FedEx Freight Holding Company, Inc. 2027 Q1 Earnings Call

Mary, please go ahead. Good afternoon, and welcome to FedEx Freight's earnings conference call to discuss our results for the four-month transition period ended September 30, 2026.

The accompanying earnings release and investor presentation are on our website at ir.fedexfreight.com. This call is also being streamed from our website. Joining us today are John Smith, President and Chief Executive Officer of FedEx Freight, and Marshall Witt, our Executive Vice President and Chief Financial Officer. Following prepared remarks, John and Marshall will both be available to answer questions. To allow time for as many participants as possible, we ask that you limit yourself to one question. Afterward, you are welcome to rejoin the queue if you have any additional questions.

During the call, certain statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, and are subject to factors that could cause actual results to differ materially from those expressed or implied. For additional information, as well as reconciliations of the non-GAAP measures discussed today to the most directly comparable GAAP measures, please visit our website and refer to our press release and SEC filings. With that, I'd like to turn the call over to John for opening remarks.

Thanks, Mary, and good afternoon, everyone. Today marks an important milestone for FedEx Freight as we report our first operating and financial results as a standalone company. Leveraging the strength of North America's largest LTL network and the dedication of our talented team, we delivered a solid quarter marked by disciplined execution across the organization and early progress against the strategic priorities we outlined at Investor Day. While we remain in the preliminary stages of our journey as an independent company, our first four months reinforce our confidence that the actions we're taking are strengthening the business and laying the foundation for long-term profitable growth as well as cash generation. Beyond our operational and financial performance, we continue to make steady progress on what remains our most important priority, and that is safety above all.

So far this calendar year, we have delivered positive trends across all key safety metrics, including countable injuries, lost time injuries, preventable accidents, and DOT preventable accidents. These improvements are a reflection of the commitment and accountability of our team and highlight our focus on operating a safer, stronger business. We have a lot of ground to cover today, and in addition to discussing our quarterly results, we will provide an update on the progress we've made since the separation. We will highlight key accomplishments across our operational, commercial, and technology initiatives and share our expectations for the upcoming quarter. As we look forward, we remain laser-focused on executing our clear and consistent strategy, strengthening our business, and creating long-term value for all our stakeholders.

To achieve this, our objective is straightforward for each and every quarter: deliver for our team, deliver for our customers, and in doing so, deliver profit for our shareholders. Starting with our team, FedEx Freight once again earned top honors at the transportation industry's premier driver and technician competitions, reinforcing our culture of operational excellence. In total, our drivers and technicians captured 10 podium finishes. This includes two national championships and seven top three finishes at the National Truck Driving Championships. Our technicians earned the TMCSuperTech Grand Champion title and swept all the top three overall spots. Also during the quarter, two FedEx Freight drivers were selected to the Women In Trucking Image Team, further recognizing the best-in-class team members we have at FedEx Freight. These achievements are about more than awards. They're about recognizing the exceptional people who help differentiate FedEx Freight each and every day.

Also during the quarter, we launched our ESPP in August, designed to drive collective ownership and responsibility across our organization. Participation has already exceeded our expectations, with nearly 14,000 eligible employees electing to become owners of this company. Finally, we further aligned our organization by bringing our technology and commercial teams together under Mike Rodgers. His focus will be on creating an integrated, customer-focused organization while maintaining our commercial momentum. Turning now to our customers. We delivered for our customers with 98% pickup reliability and on-time service during the quarter. In addition to improving dependability, we continued to deliver better service quality with our claims ratio improving to just 0.43% during the quarter, and our claims filing frequency declining to 0.27%, both record lows.

Customer feedback remains one of the most important measures of our progress, and the annual Mastio survey, which was released earlier this month, provides important perspective into how customers view our service. While our net promoter score improved 150 basis points year-over-year, we recognize there is still substantial work to do. Despite significant transformation across the organization, this year's Mastio results demonstrate that we maintained a strong and reliable network and continued to make progress with customers. However, the survey also supports our belief that our greatest opportunity lies in further improving the customer experience. Building customer confidence and preference is a multi-year journey for us, not a four-month effort, and we remain committed to making steady progress in the areas that matter most to our customers.

Now, the momentum we are seeing across our customer, service, and operational metrics is important because these are the leading indicators of long-term financial performance and profit for our shareholders. During the four-month period, volume and base yield trends continued to stabilize, reflecting a significant moderation from prior year declines earlier in 2026. While broader freight conditions have shown signs of improvement, we are also encouraged that our commercial, service, and customer experience initiatives are also beginning to contribute positively to underlying performance. Additionally, the pricing actions we are taking should support future performance. Since June 1, we have successfully renewed approximately 25% of our contractual portfolio and achieved our strongest renewal pricing performance in recent years. Given that approximately two-thirds of our revenue is generated under negotiated customer pricing agreements, we believe our contractual renewal performance provides meaningful support for future yield improvement.

Separately, in September, we announced a 6.9% general rate increase, or GRI, that will become effective January 8 and apply to approximately one-third of our revenue base, and it is intended to appropriately align our pricing with the value of the service we provide, all while supporting continued investment in the business and our long-term growth objectives. Taken together, we generated $3.3 billion in revenue, up 9% year-over-year, and $510 million in adjusted operating income, which is an increase of 16% versus the prior year. This translated into an adjusted operating margin of 15.5% for the four-month period ending September 30. We also delivered adjusted earnings per share of $2.15 and generated approximately $239 million of free cash flow during this period.

Now, before Marshall walks through our operational and financial results, I would like to share an update on our progress and discuss several early indicators that demonstrate the impact of our strategic initiatives. At our April Investor Day, we outlined a roadmap to enhance the customer experience, improve profitability, and unlock significant opportunities we see across the business. As a reminder, our strategy is centered on four key priorities: optimizing our network, strengthening our commercial offering, advancing our technology capabilities, and driving financial value creation. Collectively, these initiatives are intended to strengthen our market position, improve long-term profitability, and create durable value for all stakeholders. So beginning with the first pillar of our framework, our network. While our status as a standalone public company is new, the strengths that underpin our business are not.

We enter this next chapter as the largest LTL carrier in North America, supported by the industry's fastest published transit times and most dense network. We also have a highly experienced workforce and a proven operating model built over decades. Since becoming an independent company, our operations teams have been executing with a renewed focus on high-quality, efficient, and profitable service. One area where the focus is particularly evident is claims performance. As I noted earlier, we have made strong progress on improving our claims ratio. Since 2022, our claims ratio and claims filing frequency have each improved by approximately 20 basis points, reaching record performance levels of 0.43 and 0.27 respectively. These improvements reflect continued gains in freight handling and operational execution, particularly when you consider the high value and mission-critical freight our customers entrust to us every day.

Importantly, our claims metrics are not adjusted, providing a transparent view of the quality, consistency and reliability of our service offering. Additionally, we continue to deliver strong service performance, achieving 98% pickup reliability and on-time service. These results reflect disciplined operational execution across the network and reinforce our commitment to delivering the dependable experience that our customers expect from us. While we're pleased with these outcomes, we recognize there is more work to be done and see additional opportunity to further strengthen our performance over time. Another area of focus has been driving network efficiency. During the quarter, cube utilization improved more than 3% year-over-year, reflecting our continued progress with improving asset productivity. A key enabler of this effort is our DIM in Motion technology, which captures dimensional data for more than 90% of the freight moving through our network.