On Tuesday, FedEx (NYSE:FDX) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
FedEx Corporation reported strong financial performance for Q4 FY26, with revenue growth of 13% and adjusted operating income growth of 3%, driven mainly by yield and volume strength at Federal Express Corporation (FEC).
The company achieved significant savings through its Network 2.0 transformation and structural cost reductions, exceeding its $1 billion savings target.
FedEx provided an optimistic outlook for CY26, projecting adjusted earnings per share between $16.90 and $18.10, reflecting 20% growth in the transition year.
Strategically, FedEx completed the spin-off of FedEx Freight, allowing both entities to focus on their core operations. The company continues to expand its presence in high-value B2B and B2C markets, particularly in healthcare and technology.
Operational highlights include the continued integration of AI and data into their processes, achieving double-digit revenue growth in these areas, and a new pilot contract agreement.
Management expressed confidence in sustaining momentum, with a focus on premium segments and ongoing cost management efforts.
Full Transcript
OPERATOR
Good day and welcome to the FedEx fourth quarter and fiscal 2026 earnings call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your touchtone phone. To withdraw your question, please press Star then two. Please note this event is being recorded.
I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jenny Hollander.
Jenny Hollander (Vice President of Investor Relations)
Good afternoon and welcome to FedEx Corporation’s fourth quarter earnings conference call. The fourth quarter earnings release and statbook are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. Today’s earnings release includes segment results for FedEx Freight given the separation occurred on June 1st after Q4 FY26 ended. Additionally, as a result of the spinoff, we will not cover FedEx Freight results in detail in our prepared remarks or Q&A session.
FedEx Freight will host a separate earnings call on June 25th. 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 in 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 on this call to the most directly comparable GAAP measures. Joining us for prepared remarks on the call today are Raj Subramaniam, President and CEO, Bri Kureri, 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.
Raj Subramaniam, President and CEO
Thank you, Jenny, and a heartfelt thank you to Team FedEx for a very strong finish to FY26, a year of tremendous value creation. Each quarter of this fiscal year, we delivered on our financial commitments while supporting our customers with excellence. Our results demonstrate that we are growing revenue in the most premium segments of the global economy. As trade patterns evolved, we flexed our network to keep supply chains moving. Our network transformation via Network 2.0, Tricolor, and opportunities in Europe is driving better density and efficiency.
This progress, combined with a sharp focus on structural cost reduction, enabled us to exceed the $1 billion transformation-related savings target that we shared at the start of the fiscal year. Our data and technology advantage is helping us win new business, improve the customer experience, and create new value. The momentum you are seeing across our business is proof that our strategy is working. It’s translating to favorable financial outcomes, including very strong free cash flow and FY26 results that far exceeded our initial FY26 outlook.
Our results also surpassed the high end of the revised outlook range we provided in March. Additionally, we completed the spin-off of FedEx Freight on June 1, positioning both companies for success as separate focused industry leaders. I want to thank the teams that executed the spin-related work to achieve this milestone, especially given how well they also maintained focus on our day-to-day core operations. I’m confident FedEx Freight is extremely well positioned as an independent company, and I wish John Smith and the freight team the very best.
Now turning to our full-year consolidated results. On a year-over-year basis, we grew both revenue and adjusted operating income by 8%, with significant adjusted operating income growth at Federal Express Corporation or FEC, partially offset by a decline at FedEx Freight. At FEC, we grew full-year revenue by 9% and adjusted operating income by 17%, with 60 basis points of year-over-year adjusted margin expansion. We delivered a 7.7% adjusted operating margin, the highest margin rate in four years, reflecting the structural improvements we have made to the business.
What also stands out is that we achieved these results despite several significant headwinds, particularly global trade policy changes and the grounding of our MD11 aircraft fleet. We began safely returning the MD11s to service last month, working in lockstep with Boeing, the FAA, and the NTSB. I appreciate the efforts of our flight operations, technical operations, and airline safety teams whose work enabled four MD11s to resume flight to date. We expect to have the full fleet back in service before peak in Q4.
On a consolidated basis, we grew revenue 13% and adjusted operating income 3%, led by FEC and partially offset as expected by a decline in adjusted operating income at freight. At FEC, revenue increased 14%, driven by yield and volume strength across almost all of our services. This demonstrates our deliberate strategy to grow in the higher-yielding segments of the market. Q4 adjusted operating income at FPC increased 13%. The revenue strength I just mentioned offset the impact of higher fuel costs and variable compensation.
Against this backdrop, today we are initiating an outlook for calendar year 2026 as we transition to a December 31st fiscal year-end. Based on our current assumptions, we expect calendar year 2026 adjusted earnings from continuing operations to be $16.90 to $18.10 per diluted share. This range implies 20% adjusted EPS growth in the June through December transition year, highlighting the momentum in our business. We remain firmly on track to achieve our Investor Day commitments for 2029 with clear proof points in the quarter.
B2B services drove the majority of our quarterly revenue growth, supporting high profit flow-through. I’m especially encouraged by our progress and pipelines in the key healthcare, automotive, aerospace, and data center verticals. Bri will share highlights shortly. We successfully advanced Network 2.0 in Q4. By the end of this month, about 45% of eligible volume will flow through nearly 490 Network 2.0 optimizations, rising to 65% before peak. At that point, as we have done in the past two years, we will pause implementation until early 2027, helping us set up for a very strong peak.
We remain on track to achieve nearly $1 billion of Network 2.0 and associated 1 FedEx savings by the end of this calendar year and the full $2 billion by the end of CY27. In Europe, we achieved our 12th consecutive quarter of international revenue share gains, driven by our strong value proposition and improving service levels. Leveraging our U.S. surface playbook in Europe, we recently announced a strategic investment to expand our technologically advanced and strategically located road hub in Deuven, Netherlands, supporting continued growth in the premium international parcel and freight markets.
We believe Europe remains our largest international profit improvement opportunity, and our transformation plans remain on track across the globe, supported by our Tricolor strategy. We continue to see strong international air freight growth as we further increase our share in this $90 billion global market. You’ve heard me speak about the strength of our data from transporting more than $2 trillion worth of goods each year and delivering nearly 18 million packages each business day.
We have embedded AI into our drive process, enhancing the rigor with which we work. Our data and how we deploy it is helping to drive significant innovation across the company, driving differentiation and improving the customer experience. Our ability to leverage this data has earned us the distinction of being named to Fast Company’s Most Innovative Companies list for 2026 for our efforts to reshape global trade, simplify the cross-border experience, and strengthen economic resilience for businesses and consumers worldwide.
Before I close, I want to acknowledge the agreement we recently reached with our pilots on a new contract. This agreement marks a pivotal step forward, uniting our team behind a shared strategy for success as we continue to modernize our global operations and transform the business overall. Our FY26 results demonstrate the power of our unique global industrial network, strong value proposition, and outstanding execution of our profitable growth strategy, which is translating to strong free cash flow and value creation.
I have never been more confident on our path ahead, and I’m excited to build on this momentum in the weeks and months ahead. Now over to Bri.
Bri Kureri, Executive Vice President and Chief Customer Officer
Thank you, Raj. I want to commend Team FedEx for a year of outstanding execution on our commercial strategy, including a very strong finish to fiscal year 26 with a focus on premium B2B verticals and high-value B2C. We grew volume and yield every quarter of fiscal year 26. As a result, we profitably increased revenue by nearly $7 billion compared to last year, a truly impressive achievement. We have continued to help our customers navigate a very dynamic and complex environment, the implementation of global trade policy changes, geopolitical unrest in the Middle East, and the IEFA refund process.
In April we began to file claims with CBP on behalf of our customers and beginning in August we will be passing these refunds through to our customers. Turning now to our Q4 results, SEC revenue was up 14% supported by yield strength across all services and volume growth aligned with our commercial strategy. This growth includes a 5 percentage point benefit from fuel price driven surcharge revenue. As a reminder, fuel was not a material driver of our adjusted operating income given the higher expense in Q4, we grew US domestic volume by 3% year over year led by ground, commercial and home delivery strength aligned with our deliberate strategy to focus on parts of the market that value our competitive differentiation. Ground economy volume declined about 5%, a trend we expect to continue for the remainder of CY26. As anticipated, US priority volume continued to grow with a sequential deceleration in the growth rate as we lapped the onboarding of new healthcare business in Q4 of fiscal year 25. International export package volumes were up for the second consecutive quarter growing 5% year over year.
We supported changing trade patterns by flexing our network enabling double digit international export revenue growth on the Asia Europe lane within Asia and US outbound lanes in Q4. Strength in Asia was a key driver of our international priority volume. The 9% decline in international domestic volume is part of our European improvement strategy where we are intentionally focused on growing higher yielding cross border volume. We continue to win share in the international export freight market enabled by Tricolor with average daily pounds up 12% year over year.
FEC package yield increased 11% in Q4. While fuel was a meaningful driver, base yield supported by our value proposition and service remained very healthy. In fact, the significant majority of our incremental profit from yield was due to base price increases, demonstrating our disciplined approach to revenue quality within our US domestic services. We grew yield 10% driven by fuel surcharges, higher base rates and favorable service mix. International export package yields increased 10% driven by fuel surcharges, higher weight per shipment due to mix shift and favorable currency movement.
We are very encouraged by our progress and retention rates across key high value B2B and specialized B2C verticals with our small and medium business customers. Fiscal year 26 was a year of remarkable strength. Our seamless digitally enabled experiences complement our loyalty program and physical network well. About 40% of our US micro and small business volume is tendered at retail providing a frictionless touch point. And the vast majority of our small and medium revenue comes from direct shipper relationships on FedEx contracts, not through digital resellers so we can truly demonstrate our differentiation.
This approach supports both revenue quality and customer retention as part of our continued focus on the $80 billion plus healthcare transportation market. Earlier this month we launched FedEx Life Sciences, a dedicated organization supporting the increasingly complex movement of healthcare shipments and strengthening our end-to-end pharma solutions. While the formal launch of this organization is new, our capabilities are backed by years of strategic investment in healthcare and life sciences.
This includes specialized life science centers across Europe and APEC, dedicated quality resources and the development of global healthcare corridors connecting key markets. Our value proposition continues to expand anchored by the recent launch of a temperature controlled corridor connecting Ireland to our US network. Exiting fiscal year 26 with nearly $10 billion in healthcare transportation revenue, I am confident our new suite of life sciences services will further strengthen our ability to support complex time critical and highly regulated healthcare supply chains.
The AI and data center space is an emerging and rapidly scaling growth engine for us, delivering double digit revenue growth rather than a narrow vertical. This space represents a horizontal ecosystem. We are capturing demand across the entire value chain from traditional hyperscale retailers to the industrial and power infrastructure that support these massive build outs. What differentiates FedEx here is our unmatched responsiveness and our premium capabilities leveraging network priority, near real time monitoring and white glove handling.
We are getting very positive feedback from our customers on our agility. As a recent example, a major global technology customer had a last minute critical need to move multiple pallets of tech infrastructure to the United States through seamless cross regional collaboration. We executed flawlessly. This example is not a one off. We are seeing these initial time critical shipments convert quickly into larger repeatable revenue streams. Looking ahead, we believe continued enhancements to our value proposition and our global air freight portfolio will strengthen our competitive positioning across all our high value B2B centric verticals.
Let’s now turn to our revenue outlook for CY26 and using a CY25 revenue baseline of approximately 82 billion, we assume current volume and yield trends continue supporting revenue growth of approximately 11% including approximately 3 percentage points for a 6 fuel price driven surcharge benefit. This equates to revenue growth of 10% in the June through December transition year. During that period we expect broad based growth across services with deceleration in the US Domestic growth rate as we lap last year’s strength from new business onboarding.
We also expect a low single digit volume decline within ground economy and high single digit decline within international domestic services. Given our focus on higher yielding parts of the market where customers deeply value the solutions that FedEx can deliver, we expect trends across our international export services to largely be in line with Q4. Our fiscal year 26 results demonstrate the strength and durability of our commercial strategy. Congratulations again to our team for delivering outstanding results across the entire globe, supporting our customers with innovation and reliability, growing in key high value verticals and delivering profitable revenue growth. We believe our value proposition is industry leading and it will enable us to sustain this momentum as we continue supporting critical supply chains globally. Now over to Claude.
Claude Russ, Enterprise Vice President, Finance
Thanks Bri. Our Q4 results reflect the consistent execution we have demonstrated all year. We took bold actions to manage capital spending. We executed our business plan to deliver strong adjusted operating income growth and as As a result, we delivered historic levels of adjusted free cash flow. These results demonstrate our momentum toward our calendar year 2029 targets. We continue to unlock significant stockholder value on a consolidated basis. In FY26, we delivered $20.24 in adjusted earnings per share, growing adjusted earnings for seven consecutive quarters. We achieved this while successfully navigating significant headwinds from the global trade environment, variable compensation rounding of our MD11 fleet, and lower FedEx Freight results.
Consolidated adjusted operating income improved $491 million or 8% for the full year despite a nearly $400 million headwind from FedEx Freight results. FEC posted higher FY26 results year over year with adjusted operating income up $940 million on almost $7 billion in revenue growth. The strong flow-through to the bottom line demonstrates the powerful operating leverage in our business. In Q4, on a consolidated basis, we delivered $6.31 in adjusted EPS above the high end of our outlook range driven by FEC.
Strong commercial execution and premium verticals that Bri mentioned, paired with transformation-related savings, enabled these results at FEC. In Q4, adjusted operating income increased by $214 million, 13%. Our adjusted operating income performance was driven by base yield momentum across most services, increased U.S. and international export volume, and continued structural cost reductions. These drivers were partially offset by operating expenses increases, which included increased variable incentive compensation accruals and direct trade-related costs.
Our base yield growth was robust, which combined with sustained volume growth, shows the underlying health of our financial results. While a price-driven increase in fuel surcharges drove higher revenue, it was not a material driver of our adjusted operating income for the quarter. FedEx Freight Q4 adjusted operating income fell by $114 million, and adjusted operating margin declined 570 basis points. As we mentioned earlier, due to the June 1st spinoff, the FedEx Freight leadership team will provide additional commentary around their Q4 results during their earnings call on June 25th.
Our fourth-quarter results include a non-cash impairment charge of $2023 million related to our decision to permanently retire an additional 10 jet aircraft, including 5 MD11s. Over the last four years, we have removed a net 34 jet aircraft from our fleet, which is an 8% reduction versus FY22. These actions are aligned with our tricolored network 2.0 strategies to drive improved efficiency and density across both our global air network and North American surface operations.
Moving to capital allocation, in FY26, capex was $3.8 billion, $300 million below the outlook we provided in March. CAPEX as a percentage of revenue is 4%, the lowest level since FedEx Corporation was formed. As a reminder, we target CY29 capital intensity to remain at approximately 4% of revenue. This is a durable trend as we anticipate continuing to leverage our modernized network. Additionally, FY26 was only the third fiscal year in our history where CAPEX was lower than depreciation and amortization, a result of our continued capital discipline and network optimization.
In FY26, we achieved $4.7 billion in adjusted free cash flow. This is up $800 million versus FY25. This year’s free cash flow represents nearly 100% conversion from adjusted net income, another monumental achievement. We are laser-focused on unlocking stockholder value through strong free cash flow generation. Our free cash flow growth supports our capital returns framework. We recently increased our dividend by 5% after adjusting for the FedEx Freight spinoff, making this the sixth consecutive annual dividend increase.
During the remainder of CY26, we plan to repurchase up to $1 billion worth of shares opportunistically as we leverage continued balance sheet flexibility and free cash flow generation to offset dilution from equity compensation as discussed at our Investor Day. As a reminder, we are now transitioning to a calendar year reporting cycle. Today, we will orient our forward-looking commentary aligned with this new framework. In CY26, we expect CapEx to be approximately $3.9 billion.
We anticipate contributing $475 million to our pension plan, which was 105% funded as of May 31. We expect robust levels of free cash flow for CY26 and are fully committed to realizing our targeted $6 billion in adjusted free cash flow in CY29. Going forward, we will continue a balanced approach to capital allocation across dividends, share repurchases, pension contributions, and strategic growth investments. Now I’ll walk you through our expectations for CY26, which includes the five months we’ve already reported as well as the June through December transition year as Bri shared.
We are currently planning for consolidated CY26 revenue growth to be approximately 11%, including about 3 percentage points assumed fuel price-driven surcharge benefit. We expect this outlook to be supported by continued momentum within base pricing and increased demand for premium B2B and high-value B2C services. This translates to an adjusted EPS range of $16.90 to $18.10 with a midpoint of $17.50. We will finalize CY25 adjusted EPS baseline by mid-August when we release an 8K filing with our recasted and resegmented financials for CY24 and CY25.
For preliminary comparison purposes, we assume a $15 CY25 adjusted EPS baseline, which excludes FedEx Freight results. Our recasted financials, including the CY25 baseline, reflect continuing operations only and are burdened with stranded costs previously allocated from FEC to FedEx Freight through intercompany charges. Our CY26 adjusted operating income bridge shows the key year-over-year element embedded in our outlook for continuing operations.
This bridge reflects adjusted operating income of $5.8 billion equivalent to $17.5 of adjusted EPS, the midpoint of our range. Our assumed CY25 adjusted operating income starting point is $5 billion, which includes approximately $350 million of stranded cost. In this scenario, FEC volume-related revenue net of variable cost is expected to be a $600 million sales tailwind in CY26. This is driven by the continuation of strong trends we have seen in the first five months of the year as our commercial team continues to capture increased demand from the most premium verticals of the global economy.
With respect to FEC yield, we expect a $3.7 billion tailwind. This demonstrates our ongoing commitment to revenue quality and improved base pricing. Consistent with prior practice, the yield bar does 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 in currency exchange rate effects. Moving to anticipated headwinds, the base expense increase we assume $2.6 billion in higher costs year over year related to higher wage and purchase transportation rates and other inflationary factors.
It also incorporates ongoing structural cost reduction efforts, including savings from our Network 2.0 transformation. Additionally, we expect variable compensation to be an $800 million headwind reflecting our commitment to rewarding employees for their outstanding performance. Context, we have already incurred most of this expected CY26 headwind in the first five months of the year. Only $100 million of this headwind is incremental to the remaining seven months of CY26.
We are also assuming a $200 million headwind from the ratification of our new pilot agreement and a $100 million benefit from the removal of stranded costs related to the spinoff of FedEx Freight. Against the $600 million base of costs we previously allocated to freight, we have conveyed approximately $250 million directly to FedEx Freight. As noted on the CY26 bridge slide, we expect to remove about 30% of the remaining stranded cost this calendar year through transition services agreements and cost management.
Regarding the near term, we expect the revenue trends we saw in Q4 FY26 to continue into the first four months of our June through December transition year with US domestic growth rate decelerating as we continue to lap last year’s strong trends. Given the reporting calendar change, our next earnings release on October 28th will cover our June through September 2026 results. In addition to shifting to a calendar year reporting cycle, we are also resegmenting our results to cover Express, US Domestic, Express International Incorporated, and others.
At the midpoint of our CY26 outlook range, we expect our seven-month transition year consolidated achievement adjusted operating income to be $3.8 billion, up 19% year over year. We expect the majority of this adjusted operating income to fall in Q4 in line with our recent higher peak profitability trends. We also anticipate strong performance in June based on current trends and note the June 29th effective date, the new pilot contract. We expect both US domestic and international profit to improve year over year in the transition period.
Transition year assumptions translate to an estimated $11.3 of adjusted EPS for the June through December 26 period, representing 20% year over year growth. We forecast our CY26 average share count to approximate our quarter Q4 FY26 average share count. In closing, our FY26 results indicate that our strategy is working. We are on track to achieve our CY29 targets. We plan to continue driving profitable growth through our superior value proposition while simultaneously lowering our cost to serve.
With that, let’s open it up for questions.
OPERATOR
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question at this time. We will pause momentarily to assemble our roster. Our first question today comes from Chris Weatherby with Wells Fargo. Please go ahead.
Chris Weatherby, Wells Fargo
Yeah, hey thanks, good afternoon guys, and appreciate that outlook for EPS so we can level set the numbers on a calendar basis. But I guess maybe the question is around the relative profitability. So obviously expecting a pretty decent acceleration in the stub seven-month period for the rest of the calendar year. Can you talk a little bit about sort of the cost that maybe were lingering in the last year, I guess 15 fiscal fourth quarter, and maybe how you see those sort of working their way out as we see that growth re-accelerate over the course of the next several months?
Kind of just getting a sense of why the relative growth in fiscal fourth quarter was a little bit lower than what we’re expecting to see over the coming several months.
Claude Russ, Enterprise Vice President, Finance
Thanks, Chris, for that question. As we think about two things to think about here, and it’s really from an overall perspective, the variable compensation headwind we see in the fourth quarter of FY26 that really dissipates, that becomes only a headwind of $100 million in the transition year. But you also have to really rethink about the seasonality. So overall, going forward from a calendar year basis, that Q4 will be our strongest seasonal quarter.
And then in addition to that, just from an overall headwind perspective, we’ll have fewer headwinds in that transition year. And the key to remember here is the ongoing base business, the momentum we have in that base business, both from a revenue growth, our ongoing cost management, we feel strong about that. And that’s reflected in our 19% at the midpoint of the range, profit growth and 20% EPS growth.
OPERATOR
The next question is from Tom Wadowitz with UBS. Please go ahead.
Tom Wadowitz (Equity Analyst)
Yeah, good afternoon and thanks for the perspective on things. I wanted to, I guess, get a sense of kind of how much FEC margin improvement are you looking at? And in kind of calendar year 26, you know, kind of what’s the base look like, what’s the improvement look like? And then I don’t know if you have a thought on stranded costs. You said that’s coming out partially in the calendar 26. Does that come out fully in 27? Or how do we think about, you know, kind of the remaining piece of the 600 million? So appreciate any thoughts on those two. Thank you.
Claude Russ, Enterprise Vice President, Finance
Yeah, appreciate the question. You know, first, from a margin perspective, we are confident that the margin in the transition period, both the calendar year and the transition period, will improve year over year. It’ll improve a little bit more year over year in the transition year than it does in the calendar year because of the variable comp headwinds in the first five months of the year. But we’re confident in, you know, margin improvement during that period.
And then on the stranded cost piece, yes, we’re confident that we will go on from that starting point of 600 million. We’ve already conveyed 250 million of that in the form of employees and vendor costs from a starting point perspective. And so the $350 million starting point in that CY25 starting point, we’re confident we’ll get 100 million of that out during CY26. And then I don’t expect to be talking about stranded costs past CY27 from an exit rate perspective of CY27 is when we’re confident we’ll mitigate the remaining stranded cost.
OPERATOR
The next question is from David Vernon with Bernstein. Please go ahead.
David Vernon (Equity Analyst)
So, Claude, I just wanted to come back and make sure I understood the cadence here. So 11:30 from June to December, and as we think about that exit rate accelerating, is that just a function of the timing of the variable incentive comp, or are we seeing an actual acceleration in the underlying results of the business? That’s kind of the first part of the question. The second part of the question around a balanced approach to capital allocation. Just given the outsized size of the cash balance right now, are you in the board or is the management team of the board having any conversations with the board about maybe doing something a little bit less balanced to kind of work some of that cash off.
Claude Russ, Enterprise Vice President, Finance
Appreciate the question. I’ll go first, you know back to the question about the underlying momentum of the business is strong and we’re confident both on the revenue side and the expense side. Like I said originally on a seasonality perspective we’ve got some nuances here. We’re actually think about it June, when we report our results in October, include the month of June which is the, you know, the last month of the second quarter, it’s very strong.
It’s got 22 operating days, it’s got five Mondays. A pallet contract will not have started yet. So we expect very strong absolute performance in June. Q3 will just traditionally will be our weakest quarter from a absolute basis just from a seasonality perspective. But from an underlying year over year growth perspective, we’re confident in the momentum of the business driven by both the continued revenue momentum as well as the expense management.
To your question on capital allocation, it’s a nice issue to have. We are committed to a balanced approach on capital allocation. This strong cash position does give us flexibility. As said in my prepared remarks, we increased our dividend by 5% post spin and we do plan to repurchase up to a billion shares in the remainder of CY26. A reminder, we will also use a portion of this cash to fund our investment in in post which we expect to close during TY26.
And as we’ve said previously, we’re committed to using the dividend from the freight spinoff in a manner consistent with preserving the tax free nature of the trend of the transaction and maintaining a leveraged neutral balance sheet position. So I’m not going to give you kind of the detailed playbook beyond CY26, but I am excited about the balanced approach as well as bringing the same level of discipline and rigor to the balance sheet and shareholder returns that we’ve been delivering operationally and on our P and L. Our goal will be to deploy cash to enhance shareholder returns.
OPERATOR
The next question is from Jordan Alliger with Goldman Sachs. Please go ahead.
Jordan Alliger (Equity Analyst)
Yeah, hi, question for you. The commercial B2B business picked up quite a bit. I think it was up three and a half percent. I’m just curious how much of that was sort of tied to macro stuff versus the verticals you’re targeting. And I know you touched on AI was some portion of it sort of that AI driven CapEx spending having an impact in that segment. Thanks.
Bri Kureri, Executive Vice President and Chief Customer Officer
Hi Jordan, it’s Bri. Thank you for the question. You broke up a bit but I think I got the gist of it. Which is essentially what is driving the B2B momentum in the business. I think, I think first and foremost it’s profitable market share. This has been several years in the making where we’ve been re-pivoting our commercial team to focus on the core B2B and really getting back to our roots as the industrial heartbeat of quite frankly, frankly the global economy.
In the quarter, B2B was the majority of our revenue growth and actually it was the brightest quarter within the fiscal year. From a B2B perspective, we actually saw improvement across all four of our key verticals. From a B2B perspective. Yes, we did like to see some of the wins from an AI and a data center perspective, especially coming out of Asia. Our APAC team is just incredibly responsive and really building momentum there. But it was equally distributed across the base of those verticals.
And I will say that we did see some momentum outside of the four key verticals. I do think that there’s a little bit of inventory buildup and rebound and restocking going on, but phenomenal successful quarter. We’re really proud of the team.
OPERATOR
The next question is from Brandon Oglensky with Barclays. Please go ahead.
Brandon Oglensky (Equity Analyst)
Hi, good afternoon and thanks for taking my question. And I don’t mean to be near term focus here, but just given all the changes in reporting structure, can you guys maybe help us understand how fuel impacted the quarter as well and how you think about the fuel dynamic going forward? Especially if there’s any lead or lag in the surcharge. I know that’s maybe reset every other week, but maybe you could speak to that. I appreciate it.
Claude Russ, Enterprise Vice President, Finance
Yeah, no, I appreciate the question. Like as you said, we feel very confident in the structure of the fuel surcharge. It actually resets every week, not every other week. And so it’s been a very effective tool. As prices have gone up during fiscal the third and fourth quarter of fiscal 26. It’s acted exactly the way it was designed to act. And so overall it did not have a material impact on our profit. The increased revenue from those higher prices was able to materially offset the increased expense that shows up both in our fuel expense line item as well as our purchase transportation line item also is higher because of the fuel from our purchase transportation provider. So overall net net feel good about the overall impact and our ability to negate that impact. Maybe turn over to Bri from a, you know, from a demand perspective. But from an expense perspective we’re covered.
Bri Kureri, Executive Vice President and Chief Customer Officer
Yeah, I think Claude, you covered it from a demand perspective. You know, I was concerned a quarter ago that we maybe would see some demand destruction. That has not at all been the case. We’re growing around the and we have seen no impact to demand because of the elevated fuel prices. Let me just add one thing just on this fuel issue. If you had taken the fuel surcharge out, our margin would have been up year over year rather than down year over year.
OPERATOR
The next question is from Jonathan Chappell with Evercore ISI. Please go ahead.
Jonathan Chappell (Equity Analyst)
Thank you. Good afternoon. Bre, you mentioned the exit rate from healthcare related revenue being nearly 10 billion at this point. I understand that that’s probably the most identifiable TAM and an area of focus for several years to go back to that AI data center. Is there any way to kind of replicate, you know, at least some broad based number on what that market looks like today? And is that kind of a higher growth rate type business or vertical as you think about the coming years?
Bri Kureri, Executive Vice President and Chief Customer Officer
Yeah, great question. So a couple of things. Yes, we have started to size the total market. But I will tell you what we have found and that’s why in my prepared remark is more of an ecosystem. You cannot identify customers. Well, you can, you know, you’ve got the hyperscalers. But in addition to that, what we are seeing is broad based industrial growth in support of the build out of these data centers. You know, I walked into what I thought was an automotive sales call and it ended up being a data centers because this customer had actually pivoted an entire line to power generation for data centers. And so it is a little bit hard to categorize, categorize and define. What I can tell you is across both our industrial base and the AI base it is growing. The growth rates are the highest in the all four of the verticals. I don’t think entirely surprising.
And we also see that from a commercial response perspective. Our team is moving incredibly quickly. This is a market that is changing at a pace I’ve certainly never experienced. And I really do think this is the moment for FedEx to forge relationships that will benefit us certainly in the short term, but in many years to come.
OPERATOR
The next question is from Scott Group with Wolff Research. Please go ahead.
Scott Group (Equity Analyst)
Hey, thanks. Afternoon. Can you just give color on timing to sell the FedEx Freight stock? And if just clarity does, does the in the interim, does the guidance assume include equity earnings from FedEx Freight and then just. Claude, what on the bridge that you gave that was helpful. That 3.7 billion of yield, the 2.6 billion of cost. So call it 1.1 billion of net price cost like what’s been realized in the first five months of the year. I just want to understand if price cost is getting better or worse similar just as the year is progressing. Thank you.
Claude Russ, Enterprise Vice President, Finance
I appreciate the question. As we said in our previous filings, we plan to monetize our stake and freight in a tax efficient manner within 24 months of the spin as required by the, you know, so we’ll continue to be on track for that. And that’s all I can say on that right now. To your question on the bridge, you know, it really, you know, from an overall perspective, not a significant shift in the core business. From a mental perspective in terms of the five months we’ve seen and the remaining seven months, pretty consistent both on the revenue side and the expense side.
Obviously the timing of the headwinds is where there’s a lot of noise whether it be the pilot contract, even the variable comp. But from a core, those first bars on that bridge of the volume, the yield and the base expense, pretty consistent trend across both the first five months and what we expect for the next seven months.
OPERATOR
The next question is from Brian Osenbeck with JP Morgan. Please go ahead.
Brian Osenbeck (Equity Analyst)
Hey, thanks for taking the question, Bree. Maybe you can give us an update on utilization across the network. I know in the past you said it’s pretty tight, especially in the U.S. but ground economy volume expected to come down, international domestic also down. Assuming that’s in Europe. Are things still running pretty tight as you go through Network 2.0? And then just maybe some broader comments on the competition is we expect some of those contracts you guys won during the disruption of the labor market a few years ago. I expect those will come back up to bid. So maybe some few thoughts on what you’re seeing and expecting there as well. Thank you.
Bri Kureri, Executive Vice President and Chief Customer Officer
Sure. Of course. Thanks, Brian. So I think here in the US
Raj Subramaniam, President and CEO
Our network continues to run at very high utilization levels. I think it’s really important, and I intentionally put the comments in FedEx Ground Economy in my prepared remarks because there was a perception that we were not focused. We are incredibly focused on B2B and high-value B2C. Even with the small decline in FedEx Ground Economy, you will note that total volume is up, and we will continue to optimize the network. So I feel really good about the position of the network here in the United States.
Again, in Europe, we have a very disciplined growth strategy. We continue to take market share 12 quarters in a row. We really like the momentum we have intra-Europe. We are trading domestic volume for intra-Europe volume, which moves yield and profitability. We think it’s the right strategy, and we are going to continue to optimize the network. Wouter has made significant changes in France with more to come. So we feel good about that from a competition perspective.
As you all know, some of you asked me previously if our renewal rate was too high. We run in the mid-90s from a renewal rate. I feel really confident about the partnerships we’ve built and our value proposition. When customers come to FedEx, they stay because they get to experience that value proposition. The speed helps their cart conversion picture, proof of delivery reduces their customer service calls, and I do believe that we have the best commercial support organization.
So I am quite confident in our renewal rates. Finally, it’s important to remember that it wasn’t like one week that all these accounts came over. It was over a long period of time, and they do renew at different periods. We won’t be that far off from the next contract period as well.
Claude Russ, Enterprise Vice President, Finance
And I’ll just jump in real quick. On Scott’s question, you asked about the freight, how we’re accounting for that. That is not included in our guidance. On an ongoing basis, we will be required each quarter to mark that investment to fair value, and we don’t have any assumptions built into our outlook for that.
OPERATOR
The next question is from Risha Harnane with Deutsche Bank. Please go ahead.
Risha Harnane, Deutsche Bank
Hi, thanks. I know this question’s been asked a couple of times, but just to get some clarity, pricing was very robust on a headline basis, up 11%. But you talked about how 5 percentage points of that was fuel. So the implied ex-fuel rate kept pace with last quarter’s very robust results. Maybe talk to us more about how much of that fuel dynamic weighed on margins. Raj, you just said if it wasn’t for fuel, margins would be up year over year. I’d love to understand and get more details on how much more expansion we would have seen.
Specifically, just trying to square incremental margins of only 8% on very robust mid-teens revenue growth. I know incremental comp was an issue, incentive comp was an issue year over year. But FedEx had that last quarter too, and incrementals were a bit higher.
Raj Subramaniam, President and CEO
Yeah, I’ll take that, and then Roger Bri can add on. Start with variable comp as the biggest impact of that. When you think about fuel, the higher fuel revenue does show up in the denominator and so has an impact. It was maybe 20 or so basis points. It wasn’t a huge impact, but it would have flipped to positive versus the negative it was. But from an absolute basis, variable comp was a bigger impact. Like I said, the key here is from a TY perspective, both the CY and the TY will be improving our margin and improving the margin at a higher rate going forward.
In our TY is the momentum we’re seeing in the business.
OPERATOR
The next question is from Ken Hexter with Bank of America. Please go ahead.
Ken Hexter, Bank of America
Hey, great. Good afternoon, Raj, Bree, and Claude. Claude, getting a lot of airtime here, so congrats. Can you dig into maybe Bri, dig into international? You notice trends are in line. The balance of the year versus seeing acceleration. Can you talk opportunity there in terms of share gains and maybe talk about margins on international versus domestic?
Bri Kureri, Executive Vice President and Chief Customer Officer
Hi Ken. Happy to talk about international. I’ll talk about the top one and then turn it over to Claude who loves the airtime to talk about margin. First and foremost, I got to give a huge shout out to our APAC team. As you can imagine, last year was a very tough year for them. They faced the largest headwind from the tariff environment and the de minimis, and we’ve now had two consecutive quarters of international volume growth thanks to their determination.
They have built incredible momentum, as I mentioned, in the data center and AI space, but also leaning into their industrial base out of APAC. So it’s been really nice to see. That being said, we’re growing around the world. We saw strong momentum from Asia to Europe. As I’ve mentioned, Europe is now on a run of 12 consecutive quarters of international market share growth. We also saw some really strong results from our U.S. export team. We’ve been really focused on push-pull and even saw some bright spots from Asia into Mexico.
As the world has sort of diversified trade, our team has been incredibly responsive. I expect those trends to continue right through the PY. I don’t see any slowing down from an international volume perspective. And then, of course, the same is true from an air freight perspective. It’s a very large market, about $80 billion. We’re still a relatively small player, but we’ve had tremendous response to our tricolor strategy, and so I think that momentum will continue.
I’ll let Claude talk about margins.
Claude Russ, Enterprise Vice President, Finance
I appreciate it. As we think about the overall guidance that we’ve given you with both op profit and OP margin improving for the transition year, it’s pretty evenly split between international and domestic. We’ll obviously give you those details when we file our 8K in mid-August. You’ll have the recast financials and be able to build out the models for comparison purposes. If we think about it right now, I see both the international and the domestic margins improving.
It’s important from a seasonality perspective. The absolute number will be lower in Q3, particularly for international as Europe slows down in the late summer months. But overall, from an overall perspective, I’m excited about the momentum and see both international and domestic having absolute profit improvement as well as margin improvement in the transition in a calendar year.
OPERATOR
The next question is from Ari Rosa with Citigroup. Please go ahead.
Ari Rosa, Citigroup
Hey, good afternoon. So it seems like FEC is executing well, all the credit in the world to you guys on that. But is there anything that’s enabled from an operating standpoint without the freight segment? How are you thinking strategically about managing the business going forward? And then, are there incremental costs that can come out from here? Maybe in that context, could you help us understand why June in particular was so strong and then why we see a little bit of a deterioration, I guess, in that cadence as we think about the rest of the third quarter?
Raj Subramaniam, President and CEO
I’ll start off and then turn it over to Raj as well. But when we talk about June, the one difference about June is it’s strong from both a seasonal perspective from an absolute basis and then has the operating days, the amount of Mondays. But it really is also the pilot contract that we’ve talked about and shown on the bridge that does not hit until July, and so that weighs on the third quarter. In addition, we told you in that bridge that the $100 million of variable comp remains for the transition year.
All of that $100 million will show up in the third quarter, just from a timing perspective. So the overall transition year is on the bridge. But from a timing of that variable comp, maybe turn over to Raj from a strategy without freight perspective. Yeah, and I would just say that the fundamentals of our business remain strong even through the Q3. It’s just these one-offs, but even that, it’s just a normal seasonality. But your question about overarching strategy is very consistent with what you heard at the investor day. We are very much focused on being the heartbeat of the industrial economy, focused on premium B2B and high-value B2C. That’s exactly what we have done in executing in the last few months, and you can see the results already.
We are obviously in the middle of a huge transformation that’s driven by our network transformation, our organizational transformation, and digital transformation. Those are well underway, and that’s our targets that we set for CY29 is a 14% CAGR on the bottom line, and that’s what we will accomplish. We also have noted that free cash flow is a very important metric for FedEx, and our target of $6 billion free cash flow for FEC by CY29, and we remain on target for that.
So it’s a very exciting time. We have a lot of upside in our business. We are focused on the core and key fundamentals, and the Q4 results are very, very strong, and I’m just excited about it. Again, I also wanted to take one more opportunity to thank Team FedEx for delivering such a strong quarter.
OPERATOR
The next question is from Stephanie Morwood Jeffries. Please go ahead.
Stephanie Morwood Jeffries (Equity Analyst)
Great. Thank you. Good afternoon. I know that building your SMB portfolio is a key strategy as you think over the next couple of years, as outlined at your analyst day. But maybe if you talk a little bit about your SMB strategy here, it does seem like there’s a large competitor, Amazon, that continues to talk about expanding their third-party logistics, SMB fulfillment, and the like. So a lot of headlines there. Would love to get your thoughts and your ability to compete in what is a very competitive SMB market.
Raj Subramaniam, President and CEO
Sure. Thanks, Stephanie.
Bri Kureri, Executive Vice President and Chief Customer Officer
First and foremost, I was incredibly proud of our S and D performance all fiscal year. But the team just had a stellar solid momentum in Q4 with double-digit growth. We have the best loyalty program which, even though our overall renewal rates are in the mid-90s, it’s even higher in our SMB base. So these are really sticky, loyal customers. And one of the things that they tell us often is that they really appreciate both the digital experience complemented by our sales team and that those relationships are sometimes decades long.
So we really do have a lot of great relationships in small and medium business. To your question about Amazon entering the market, I think first and foremost we don’t see this as a new portfolio or a new value offering. And what we’re doing is we’re very focused on our strategy. As we’ve talked about, we are first and foremost focused on the B2B. We have a global network from pickup and delivery around the world, including a parcel and air freight portfolio.
The momentum that we have right now is market leading and the response continues to be really strong. We also, as I’ve mentioned, have the best visibility portfolio which really matters to our B2B customers. Their advance notifications of what is moving through our supply chain if something does go wrong, that we intervene and that they have an action plan is simply best in market. So we feel incredibly strong in B2B. From a B2C perspective, we have the best value proposition in the United States.
From a B2C perspective, we go everywhere every day. We have the fastest network. We’ve got Saturday and Sunday delivery coverage. And then again, picture proof of delivery and estimated delivery time windows. It’s fun to sell both B2B and B2C. And then I think finally going back to that relationship, we have complete goal congruency with our customers. When they grow profitably, we grow profitably. We want to support their business growth. For example, at peak, we just had our most profitable peak ever because we built the right infrastructure to help our customers grow when it matters to their P and L while still improving our own profitability.
So great relationships, goal congruency, and the very best value proposition in the market. So I feel really good about our momentum.
OPERATOR
This concludes our question and answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.
Raj Subramaniam, President and CEO
Thank you, operator. Once again, congratulations to Team FedEx for the hard work and outstanding execution through FY26. Our strong Q4 and FY26 results demonstrate that we are gaining profitable market share in the most premium verticals of the global economy. I’m proud of our momentum as we enter the transition year and I’m confident in this continued value creation that’s ahead of us. Thank you very much.
OPERATOR
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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