Good afternoon and welcome to the FedEx Corporation Third Quarter Fiscal 2023 Earnings Conference Call. Currently all callers have been placed in a listen-only mode and following management's prepared remarks, the call will be opened up for your questions.[Operator Instructions] Please be advised that today's call is being recorded.

I will now turn the call over to Mickey Foster, Vice-President of Investor Relations at FedEx. Thank you sir, you may begin.

Mickey Foster - Vice President, Investor Relations

Good afternoon and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter earnings release, Form 10-Q and stat book are on our website at fedex.com. This call and the accompanying slides are being streamed from our website. Where the replay and slides will be available for about one year. Joining us on the call today are members of the media. During our question-and-answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe-Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance may be considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties and other factors which 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. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. We are hosting a DRIVE update meeting in New York City on April 5. If you have not yet received your invitation. Please call or email me or anyone on the Investor Relations team. But those who were not able to attend the meeting in person. This meeting will also be webcast.

Joining us on the call today are Raj Subramaniam, President and CEO; Mike Lenz, Executive Vice-President and CFO; and Brie Carere, Executive Vice-President, Chief Customer Officer.

And now Raj will share his views on the quarter.

Raj Subramaniam - President and Chief Executive Officer

Good afternoon, everyone. Thanks to the hard work of the FedEx team, our third quarter earnings were ahead of our expectations in what remains a challenge demand environment. The team delivered outstanding service throughout and following peak, despite significant weather disruptions across the United States. Importantly, our third quarter results also reflect our continued progress on the fundamental transformation of FedEx. As we moved with urgency to realign our cost structure. Our cost reduction actions supported margin expansion at both ground and freight, but have not yet fully offset the impact of continued pressures that Express. Results at Express came in below where they need to be and below the potential we know exists in this business. We are committed to addressing these costs imbalances and will be taking further actions in the coming months, including a more pronounced readjustment of the air network. Because of the magnitude of changes, we are planning across our air network and our continued need to maintain high service levels, there is a lag in the timing of expense adjustments. We expect to see sequential progress in the fourth quarter. Overall, our efficiency efforts are gaining traction, ahead of schedule, and I'm pleased that this translates into an improved earnings outlook for fiscal year '23.

Now turning to Slide 6 for a snapshot of the quarter. Volumes declined by a low double digit percentage across all segments, partially offset by higher yields at Ground, US domestic Express and Freight. This led to a year-over-year revenue decline. While revenue fell across all segments, the decrease was most pronounced at Express.

Adjusted operating margins and EPS declined year-over-year as volume softness was partially offset by higher yields and cost reduction actions. Last quarter, we shared our expectation for continued pressures from lower volume and inflation. But what is also embedded in these results and what I'm seeing first hand everyday our tangible signs of the fundamental transformation happening at FedEx through DRIVE. We are rightsizing our cost base to match today's realities and creating a more efficient and agile network. We're not simply taking out cost, we are simultaneously focused on running our business more efficiently, flexibly and profitably, which will create significant value for our stockholders in the years to come.

I'm particularly pleased with the progress we're seeing in ground. The team has taken aggressive actions to address its cost structure and that's effectively mitigated volume pressures. One of the key drivers of Ground was the ability to manage staffing levels and associated expenses, which resulted in reduced salaries, benefits and purchase transportation costs. Combined these expenses were down 8% year-over-year.

Despite the dynamic environment, Ground continues to deliver for its customers during peak with an average time in transit of approximately two days compared to 2.35 days in fiscal year 2022. In aggregate, these initiatives led to a modest increase in cost per package of 1% despite 11% volume declines, and total operating expenses were down $345 million year-over-year. When combined with our continued focus on revenue quality, total operating income was up 32% year-over-year, and operating margin of 19.7% that improved 240 basis-points year-over-year.

Freight is also illustrated disciplined commitment to profitable growth, revenue quality and managing costs volumes. The team continues to execute cost reduction actions in this regard. Beyond day-to-day management of variable costs, the Freight team is temporarily parking and selling equipment to right size the fleet and reduce future maintenance costs. The team is also limiting hiring and furloughing employees to match staffing with volume levels.

We're taking the relevant learnings from this proven Freight model and implementing them at both Ground and Express. Total operating expenses at Freight was down 6% supporting 270 basis-points of margin expansion in the quarter. Importantly, our cost initiatives did not compromise the consistent outstanding service levels dellaverde by the Freight team.

Turning to Slide 7. We have made significant progress in taking costs out of our network $1.2 billion in year-over-year cost savings in the third quarter. We highly focused on taking permanent cost out of the system and remain on track to generate permanent savings of $1 billion this fiscal year relative to plan.

Last month, we announced a streamlined reporting structure that will reduce the size of our officer and director team by more than 10%. We will continue to aggressively manage headcount including attrition to align our teams with the network changes underway. By the end of this fiscal year, we expect US headcount to be down roughly 25,000 year-over-year.

At Express our cost base is constrained in the short term, where Express network is vast and complex and requires time to adjust to changing demand conditions. Therefore, we are taking additional steps to address our fixed expense structure. This quarter, we reduced flight hours by 8% and salary and benefit expenses by 4%. We also parked an additional nine aircraft downgaguged on certain routes and implemented various productivity improvements. As a result of these actions, we mitigated 45% of total revenue declines on an adjusted basis. This was significant improvement versus the first half.

Within the US domestic Express, we implemented a single daily dispatch of couriers in February. This change removes domestic pickup and delivery routes, improves hub and ramp efficiency. We expect this will achieve about $50 million in savings in Q4 and ramp-up to about $300 million annual savings by fiscal 2024. We expect progress to accelerate in the fourth quarter with total flight hours expected to be down double digits and further FTE reductions by year end. This will support mid to high single digit reductions in total expenses year-over-year at Express. We also plan to temporarily park additional aircraft in the fourth quarter. With continued cost discipline, we anticipate sequential operating margin improvement in the mid single digits for the fourth quarter. Assuming the challenging demand environment persist in Q4, we expect to be able to mitigate at least 60% of the revenue related headwinds we are facing in Express. This supports improved profitability in the fourth quarter compared to the third. We will build profitability from here at Express.

Before we dive into the financial results in more detail, I'll provide a quick update on DRIVE, the program to support our transformation to create a more nimble efficient and profitable FedEx. We are on track to deliver $4 billion of permanent cost reduction by the end of fiscal 2025. I'm very pleased with the progress the team has made in identifying actions that will not only reduce costs, but make our network more agile and flexible as we execute network [ indecipherable]. One part of this effort, as shown on Slide 8, this to reconfigure our air network. This requires many steps including plans currently being developed to phase out our fleet of MD levels. Our aircraft modernization program and use of 777 and 767s affords us the ability to flex our plans. And as we operate more collaboratively we are leaning into the ground transportation more, requiring less capex, while enabling us to reconfigure our network more quickly. This directly supports our goal for meaningful ROIC improvement. In the coming years. We're excited to share more about the strategy and our DRIVE program update on April 5. There we will focus on the actions we're taking to improve our performance along with additional information to help you better model the impact on our progress.

Now let me turn it over to our Chief Customer Officer Brie Carere, who will discuss market trends and our commercial strategy in more detail. Brie?

Brie Carere - EVP and Chief Customer Officer

Thank you, Raj and good afternoon, everyone. As expected, the operating environment in the third quarter remained challenging. The trends we saw through the first half of the year persisted, but we started to see some moderation and importantly our team delivered excellence for our customers. At FedEx Ground, revenue was down 2%. The volume decline was significantly offset by a double digit percentage yield increase driven by better product mix, fuel and large package and peak surcharges. We are very pleased with the results from the implementation of our global rate increase this past January, which has maintained a very high capture rate. At FedEx Freight revenue was down 3%. The team's continued execution on revenue quality actions and profitable share enabled us to offset 12% volume decline throughout the quarter. Importantly, pricing discipline across the LTL industry is strong and we expect the market to remain rational. Revenue at FedEx Express was down 8% year-over-year, primarily due to lower volumes globally and yield softness in Asia and Europe.

In Europe, we're seeing improved operational execution with service at the best levels they have been since fiscal year '21. There is more work to do, but momentum is building, as our team has improved service levels while maintaining a healthy sales pipeline. Our pipeline and signed contracts are at their highest level this fiscal year and our closes per week are at a double digit percentage higher than they were in Q1. Additionally, having a Freight and parcel bundle for our customers in Europe differentiates us from the rest of the market.

In Asia, market demand is rebalancing, resulting in lower yields and softer demand for priority services. The reopening of our international economy service this may well help stabilize our volumes out of Asia, given the market's increased shift to deferred services.

Moving now to Slide 11. As expected yield growth has been increasingly pressured across segments as year-over-year fuel surcharge comparisons normalize and customer demand shift. FedEx Express international turned negative, driven primarily by Asia with Europe also softening. US domestic Express Ground and Freight yield growth also decelerated. Despite market headwinds, we're pleased with the team's ability to manage volume, share and margin at both FedEx Ground and FedEx Freight. Looking ahead, we remain prudent in our expectation for yield in the fourth quarter.

Turning to Slide 12. Services always top-of-mind for us at FedEx. Our team delivered another busy peak season highlighted by FedEx Ground achieving pre-pandemic service levels. In fact, across the board FedEx Ground delivers to more locations in one or two days than our nearest competitors ground service. I would also like to share progress we're making at Express where service levels improved significantly over fiscal '22 peak and are quickly approaching pre-pandemic service levels. While this is great progress, we know we have more to do and we're making– taking meaningful action to continuously enhance our service.

For example, in Europe with the reopening of our Duiven, Netherlands road hub this past October, we have expanded capacity enabled a more efficient routing and we have improved our service. These improvements are a testament to our team's ability to deliver outstanding service while we change our business.

Coming out of peak, service improvement has translated into good momentum for our sales team. Jill and I are also very pleased with the market's response to several new or enhanced offerings that further improve customer experience. First, the online FedEx ship manager has been fully modernized to make shopping more efficient, highly personnel and easier to use for all of our customers. Our customers can cater the interface to the way of working they prefer and that fits their business. Customer feedback has been very positive and we're finding that the more customers engage with ship manager the more they appreciate it. FedEX ship manager is the primary tool for small business customers and we plan to migrate 98% of all parcel shippers to this new experience before next peak.

Next, we launched picture proof of delivery ahead of peak season, making us the first to market with this great capability and has fulfilled a key customer need driving confidence around successful package deliveries. Benefits from this launch include fewer delivery dispute and fewer customer service calls post proof of delivery. We are winning new business because of this unique feature. We have also continued to build out our dynamic pricing infrastructure with our DataWorks team. In peak our dynamic pricing capability enabled holiday peak residential surcharges to adjust dynamically based on individual customers weekly peaking factor, delivering $150 million in profit. In the coming fiscal year, our predictive anomaly detection will improve revenue quality. We have already built infrastructure that helps us identify instances when we have overbuilt our customers. Now,we will use those same capabilities to better manage customer performance and contract compliance.

Finally, in January, we rolled out new visibility insights in 13 countries, providing customers with a four hour time window for their package delivery. By delivering these innovative solutions, our teams are creating great value enhancing the overall customer experience.

Now, I will turn it over to Mike to discuss the financials in more detail.

Mike Lenz - EVP and Chief Financial Officer

Thank you, Brie. Starting with our performance in the third quarter, we delivered earnings ahead of our expectations as our team moved with urgency to align our costs with lower revenue as global volumes remained under pressure. Turning to the Transportation segments. At Ground, operating income increased 32% and operating margin expanded 120 basis-points to 9.7%. Margin expansion was supported by both yield growth of 11% and cost reduction actions. These factors were partially offset by lower package volume, higher infrastructure costs related to previously committed projects, and increased other operating expenses. And at Freight, the team's focus on revenue quality and managing costs drove better profitability as operating income increased 15% and margins expanded 270 basis-points. This was driven by revenue per shipment up 11%, as well as a gain on the facility sale and partially offset by decreased shipments.

At Express, our results continue to be pressured and our team is acutely focused on driving improved profitability. Adjusted operating income declined 81% due to 10% lower package volumes as cost reductions lagged volume declines. Volume pressures were partially offset by improved yields. Revenue per package grew 3% year-over-year, primarily driven by higher fuel surcharges and base rates, partially offset by exchange rate impacts. Yield growth decelerated and inflected negatively in international export increasing pressure on profitability. Despite our performance in the third quarter due to the actions we are taking in Express, we expect to see sequential operating profit and margin improvement in the fourth quarter.

To provide additional color on recent demand trends and what we are planning for in our outlook, Slide 17 shows trailing monthly volume trends for our major product categories. Volume declines continue throughout the quarter. While still negative, US domestic Express, International Priority and Ground package trends improved somewhat into February on a sequential basis. As we look to the fourth quarter, we expect volume declines to continue moderating at Express and Ground as we lap the onset of softer volumes. Yield growth will be pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts most prominently in Asia.

Moving to Slide 18. Our focus on efficient and responsible capital allocation has not wavered. We are in an era of lower capital intensity at FedEx. Last fiscal year capex was 7.2% of revenue, down from our historical levels of roughly 8%. By fiscal year '25, our commitment is to be at 6.5% or lower. As I mentioned in December, we reduced our fiscal year '23 capital spend forecast of $5.9 billion, which is approximately a $900 million reduction from initial plans for the year to account for the lower demand environment. We are prudently deferring and slowing the pace of projects, improving our capacity utilization and planning for moderated aircraft fleet investment to drive ROIC improvements. In line with this approach, we expect capital spend to be roughly flat in fiscal 2024 versus fiscal 2023 and be down as a percentage of revenue.

Turning to liquidity, our cash position remains a source of strength. We ended the quarter with $5.4 billion in cash and continue to generate solid cash flows, which supports our capital return strategy. We remain committed to rewarding our stockholders as we transform our business and execute on our long-term strategy. In fiscal year '23, we will return $2.7 billion to our stockholders. In summary, our capital allocation strategy reflects our commitment to reducing capital intensity and creating value for stockholders while continuing to reinvest in FedEx for today and tomorrow.

Turning to Slide 19. In the fourth quarter of 2023, we expect market conditions to continue to negatively impact revenue and operating profit. However, on a sequential basis, we expect FedEx is fourth quarter results to follow our historical seasonal pattern representing the high watermark on the year. We will continue to execute on the previously identified cost actions and identify additional opportunities to reduce costs in order to mitigate the impact of volume declines on our operating results. As part of these reductions we will manage capacity to lower demand levels, including further reduced in flight hours at Express and reducing Sunday operations,closing certain sort operations and taking other linehaul expense actions that Ground.

We are executing targeted actions to reduce shared and allocated overhead expenses reducing vendor utilization, deferring certain technology projects and discontinuing same day city operations at FedEx office. In addition, we expect to achieve savings related to further headcount attrition and the elimination of certain global officer and director positions, which we announced in February. Putting these factors together, our updated expectation for full-year adjusted earnings is $14.60 to $15.20 per diluted share.

And with that, let's open it up for questions.

Question & Answers

Questions and Answers:

[

Operator

[ Operator Instructions] We'll take our first question from Ken Hoexter of Bank of America.

Ken Hoexter - Bank of America - Analyst

Okay. Great. Good afternoon, and great job on pulling some of the cost forward, maybe Mike or Raj, maybe talk a little bit about that sequential improvement. You're talking about a seasonal improvement, but I mean, you normally have that. And Mike, you mentioned you'd normally have that seasonal improvement in the fourth quarter. So I'm trying to understand, are you meeting that expectation, or are you ramping that expectation into the fourth quarter given the additional costs pulled forward than what we would normally see between a fiscal third and fourth quarter? If you can kind of walk through maybe some of those detailed cost pull outs and the impact for the quarter. Thanks.

Mike Lenz - EVP and Chief Financial Officer

Sure. Thanks Ken. So, as Brie highlighted for the fourth quarter, we continued to project a lower level of demand and that just heightens the emphasis of further traction on the cost initiatives. So Express, in particular we'll realize greater savings from the initiatives that we've highlighted and that will drive to the mid-single-digit margin projection there. At Ground, we also expect margin improvement at ground, but not to the same magnitude that we realized in the third quarter. And then lastly Freight, we had an exceptional fourth quarter last year and we're projecting strong performance in the fourth quarter of this year as well. But we're not anticipating building upon that near term given the volume declines there. So hopefully that puts it in context further for you there thinking ahead.

Operator

We'll take our next question from Chris Wetherbee of Citigroup.

Chris Wetherbee - Citigroup - Analyst

Hey. Thanks. Good afternoon guys. Maybe just picking back up on the Express commentary for fiscal 4Q. So, I think mid to-high single-digit year-over-year decline in total expenses for Express would probably put us kind of flattish sequentially. So maybe you could just sort of help us a little bit with the revenue dynamic. I think, Mike, you talked about volume declines moderating as we went through the third quarter. Any thoughts on maybe how to think about the fourth quarter. No, it's still a challenging environment, but trying to triangulate a little bit with some of the numbers you've given us to– on the revenue side there.

Brie Carere - EVP and Chief Customer Officer

Sure. Happy to help, Chris. It's Brie. From a volume decline perspective what we anticipate seeing in Q4, is that the decline will get less. So sequentially, the volumes will improve from Q3 to Q4. And actually we're more thinking about it Express, we think that trend will continue into Q1 as well. That is here in the US, but also from an international perspective, as we talked about we're going to open up international economy. So we do think that the volume decline will moderate Q4 over Q3 as well as Q1 over Q4. And again I'm talking about that decline year-over-year. I hope that helps. Chris.

Operator

Our next question is from Jack Atkins of Stephens. Okay, great. Good evening, and thank you for taking my question. So I guess as we think about the DRIVE initiatives here, is there any way you can help us maybe frame-up how much of that–of the $4 billion in savings have been implemented so far in terms of those actions. And then I guess as you sort of think forward, obviously there's a lot of uncertainty out there from a macro perspective. Are you prepared to pull more levers to be able to take cost-out of the business if we start to see a further deterioration in the demand environment?

Mike Lenz - EVP and Chief Financial Officer

Okay, Jack. This is Mike. So, think about DRIVE as the framework of how we approach the business and running a more flexible and efficient operation across the board. So within that, that has enabled us to move quicker here than we anticipated coming into the quarter in terms of our cost initiatives and is also foundational to the $4 billion of structural cost reductions that we've identified. So if you think about the structural cost reductions, that's operative irrespective of the demand environment. So think of that is moving the same traffic with less assets and resources. So we look-forward to giving further updates on the progress and details of the various domains within DRIVE on April 5.

Operator

Our next question is from Jordan Alliger of Goldman Sachs.

Jordan Alliger - Goldman Sachs - Analyst

Yes. Hi. I was wondering if you could give a little more color on the cost take outs sort of for the balance of the year. I think the slides have that at around $2.4 billion. I think the total is something like $3.7 billion, was $1 billion in permanent. Can you maybe give some update around that? And is there a way to get a sense for how much so far can be attributable to the Express business in terms of cost take out maybe the permanent –at least the permanent side. Thanks.

Mike Lenz - EVP and Chief Financial Officer

So okay, Jordan, the –yes, we will– the $1 billion of permanent that Raj alluded to, we will realize that this year. The bulk of that is that Express, and we will see more traction on that particularly in Q4 here. We've highlighted the flight frequencies that we've been reducing. We have– we had– as Raj said, we had nine more aircraft parked during the third quarter and we're projecting to park six more during the fourth quarter. So that illustrative of the takedowns and reductions underway there. And then also another component of the $1 billion was taking out investments in that and initiatives and projects that we don't anticipate picking up.

Operator

Our next question is from Tom Wadewitz of UBS.

Tom Wadewitz - UBS - Analyst

Yes. Good afternoon. And also strong execution on the cost side, right, that's good to see it coming through the numbers. On the Ground side, I know you've given us good information on the call, but just wondering if you could dig into things a bit further of –within the quarter, what was most important drivers of improvement. It seems like purchases - both purchase transportation and your comp and benefits were down quite a bit. And then– so what were the biggest levers in those? And then, I think it was a year ago or while back, we were talking about labor shortages in the sorts really being a factor. Presumably you had adequate labor. How much of that was a factor in the ground improvement as well. Thank you.

Mike Lenz - EVP and Chief Financial Officer

Yes. Tom, you it it very directly there because it indeed was the case that last year was very challenging in terms of the circumstances with the labor market in that. So, I certainly would highlight in the third quarter that Ground did an extraordinary job of flexing down resources following peak there. So that was definitely a key element of the improvement there in third quarter. That won't be as big of a tailwind in the fourth quarter given the dynamics that you highlighted there. But again multiple dimensions within the ground operation of efficiency across the network within the dock and the facilities line haul, as well as pickup and delivery. So, again, good progress there and more to come.

Operator

Our next question is from Jon Chappell of Evercore ISI. Thank you.

Jon Chappell - Evercore ISI - Analyst

Good afternoon. Brie there, a lot of focus on the cost for obvious reasons, but to have the service levels back to pre pandemic levels to have the transit time down to two days amid all these cost cuts is a bit surprising. Is that just lack of density on the network because of some of the volume issues? And how do you think about hitting a macro tailwind getting some volume back in this new cost structure, the ability to maintain the service levels goin -forward.

Brie Carere - EVP and Chief Customer Officer

Yes. Thanks for the question, John. I actually don't think it's surprising. This is getting back to what we do best. We have been known historically for our customer experience and for our service. And we know when the network is running its most productive. Service actually moves with productivity. So I feel really good about it. I absolutely think that it is sustainable. And in fact, we're going to continue to do better from a service perspective. So this is what we said we would do. This is what we knew we would do. We've got a little bit more work to do, but it feels really good. And I think the sales team is really loving the momentum that it's giving them. So, I hope that helps clarify.

Operator

Our next question is from Helane Becker of TD, Cowen.

Helane Becker - TD Cowen - Analyst

And thanks very much, operator. Hi, everybody. Thanks for the time. So, maybe Brie, this one is for you. I think you talked a little bit about the costs and the progress you're making there on showing some improvement, but can you maybe parse out the difference between what you're getting on fuel surcharges? And what you're getting in the ability to actually raise price? I think you also said something about your uptake is holding out better than you thought it would, or maybe holding out better than expected? Or maybe I put those words in your mouth. So, if you could just kind of talk about fuel surcharges versus price maybe there. Thank you.

Brie Carere - EVP and Chief Customer Officer

Yes. Sure. Happy to clarify. So what we saw in Q3 from a yield perspective obviously from a yield growth we were very, very pleased from a general rate increase the capture was really strong. In fact, in Europe, it was the highest capture that certainly I have ever seen coming out of Europe. So, I think that the global pricing team and the global sales team are doing just an outstanding job. So feel really good about the execution from the GRI. As we look forward into Q4 and beyond, we will see yield growth moderate, but we think the fundamentals are going to stack. The US market right now, from a pricing perspective is very rational. The team has done an excellent job of aligning price with cost. We're getting more for peak surcharges. We're getting large package surcharges as we should. So, we think the market is rational. We did a good job in Q3 from a capture perspective. But of course, we will see moderation and yield growth next year as we're just lapping really, really high increases. I hope that helps.

Operator

And our next question is from Brandon Oglenski of Barclays.

Brandon Oglenski - Barclays - Analyst

Hey. Good afternoon and thank you for taking my question. So, Raj or Mike. I was wondering if you could give us some context around outcomes at Express this quarter. We're seeing year-on year margin declines kind of similar to where we had been maybe throughout the year even though you guys are taking credit for incremental cost out. So, I know Ground and Freight, a little bit better care, but what I guess is holding back Express, especially with similar volume outcomes. I guess international yields were a little bit softer this quarter, but what else can you attribute that to. Thank you. Brandon, thanks for the question. The main issue in Express as the demand softness was most pronounced at Express. It had the highest revenue impact. You also know Express has the highest fixed cost structure. But we are making progress on the cost side. In Q1, the cost was up year-over-year, Q2 was flat. Q3, the costs are down $430 million year-over-year and Q4 is going to get even better from there. We're making progress on the air, as we've talked about before, we have the single daily dispatch was launched in the US domestic Express operation in February. You will see that full impact of that call for the quarter in Q4 and then as we look ahead, we are fundamentally going to make this network much more agile and flexible and you supported by technology. And when you– when will talk to you a little bit more about that the April 5 meeting. Mike, I don't know if you want anything to add to that, I think…?

Mike Lenz - EVP and Chief Financial Officer

No. I think that covered. Thanks.

Raj Subramaniam - President and Chief Executive Officer

That covers it. Thank you.

Operator

Our next question is from Allison Poliniak of Wells Fargo.

Allison Poliniak - Wells Fargo - Analyst

Good evening. I just want to ask on the Trans-Pacific lane, I know it's an important lane for you. Just with all the dislocations, are you seeing any sort of structural shift away from that concerns you? Are you moving? Just any color on what you're seeing in that market would be great. Thanks.

Brie Carere - EVP and Chief Customer Officer

Yes. Hey. Great question. So we absolutely are having a lot of conversations with customers they want to diversify their supply chain over the last several years. I think it's important to remember the primary conversation that we're having is about Mexico, and we have a fantastic value proposition out of Mexico. So as customers do want to diversify, we are anywhere they need to be. So we feel really good about that, but I do want to be clear that it is a future conversation. From a magnitude perspective, we do not see any short-term large shifts that would change the position of trying to being the world's manufacturer. So, I don't think that's an immediate issue. I do think it's a future issue.

Operator

Thank you. Our next question is from Ariel Rosa of Credit Suisse.

Ariel Rosa - Credit Suisse - Analyst

Great. Hi, good afternoon. And again, congrats on some of the progress here on the cost savings initiatives. I wanted to ask about Express margins. So obviously, we saw them a little bit challenge this quarter and you said they are likely to improve sequentially going into fourth quarter, but you set this target for 8% to 9% margins by fiscal '25. I just wanted to understand what's the confidence level in achieving that. And to what extent does that depend on seeing a return in some of the volumes or maybe a stabilization in the volume declines, please?

Mike Lenz - EVP and Chief Financial Officer

Sure, Ariel. So certainly, as the environment has evolved here in the last six to nine months that's heightened our emphasis on efficiency and cost initiatives to realize margin improvement and drive improved returns on invested capital. And so the DRIVE framework is that allow –enabling us to relentlessly pursue these initiatives in a number of fronts. We talked about flexing the labor hours, the air network, the structure of the ground surface transport. So, again a lot of progress more to go, but we're very confident that express can realize the full potential going forward.

Operator

Our next question is from Stephanie Moore of Jefferies.

Stephanie Moore - Jefferies - Analyst

Hi. Good afternoon. Thank you. I wanted to touch a bit on, I think the color provided today and certainly in the Q&A and just what's going on in the Express segment is very clear and certainly more to come there. I wanted to dig in a little bit about maybe the Ground segment and trying to triangulate what has caused you to raise expectations for the full-year? I mean, just kind of Ground is clearly–you've made a lot of progress as noted on salary and employee benefits down quite a bit, but also purchase transportation down quite a bit. So as you look into Ground and particularly the strong performance in the third quarter, can you kind of pinpoint a little bit more detail what exceeded your original expectations as if you looked at the full-year. Thanks.

Mike Lenz - EVP and Chief Financial Officer

Okay sure. Thanks, Stephanie. Well, it was a number of fronts of the efficiency side with again flexing down the the labor hours following peak. We also had a lower surge premium for this peak relative to prior peak. So that was a consideration as well. But broadly the focus on utilizing the assets more efficiently and in a lower demand environment that means certain facilities in that. We closed sorts or smaller transfer points in that. We shut those down. So again, it's just about optimizing the network across the board. It's not– there's no single linchpin to that. And look, it's very much impressive to see the progress we've had here when we are also facing a headwind there from increased infrastructure costs at Ground, so that represents opportunity going forward as well on top of everything.

Operator

Our next question is from Scott Group of Wolfe. Hey. Thanks. Good afternoon. A couple of things I just want to clarify and then a bigger picture question. So Mike, the - how big was the LTL gain? Your comment about less ground improvement in Q4. Was that a year-over-year or a sequential comment? And then just bigger picture. What I want to trying to understand is how much of this $4 billion of DRIVE savings are we seeing this year, or–and how much is incremental all starting in fiscal '24? And then how much of the variable reduction should we think come back next year to offset some of that drive.

Mike Lenz - EVP and Chief Financial Officer

Okay, Scott. So first for the gain on the sale was roughly about $30 million at the Freight company for the facility there. And then, yes, the reference for Ground was that the year-over-year improvement for the fourth quarter, we wouldn't anticipate it to be as large as what we realized here in the third quarter. So that's the two freebies.

On your other question. I mean, look, we are holistically adjusting the cost base on all dimensions, all areas. Every dollar is under scrutiny. So that entails both the adjustments for reduced volume levels across the board and you see progress there in a number of the lines and then gaining traction as we lean into realizing the structural reductions with DRIVE. So we will look-forward to updating further about how the various initiatives are playing out here, when we see you on April 5. Our next question is from Brian Ossenbeck of JPMorgan.

Brian Ossenbeck - JP Morgan - Analyst

Hey. Good evening and thanks for taking my question. So, something similar here, Mike. Can you just quantify the impact of weather given how Express performed? I don't know if that was larger worth quantifying. And then just to come back to drive one more time maybe level set expectations, if you could. I think, Raj, you've talked about how we're going to get more granular details and metrics and the work streams. I don't think we've really gotten that much in the past or at least not that consistently. So should we expect to get that updated on a regular basis. We're going to see benchmarks in terms of where you are now and how that's going to roll-out to the various segments in a different work streams and how should we be thinking about that coming up here in a couple of weeks? Thank you.

Mike Lenz - EVP and Chief Financial Officer

Okay, first, Brian. Weather was roughly about a $50 million year-over-year headwind. So, if you want to put some dimensions around that. I think Raj wants to highlight what to expect here at DRIVE day.

Raj Subramaniam - President and Chief Executive Officer

Well, let me just say this much. I think I'm ust delighted with the sense of urgency and with what the team is working. The DRIVE program is, creates a lot more rigor and I'm just thrilled with the progress, as the team has applied this rigor and discipline and to the work at hand and look forward to showcasing them to you. And just a couple of weeks here. During that update, you can expect a deeper dive onto the domains that we have identified, which is shown on slide. We will show you the metrics that we've been tracking and and I think that will be - it will give you a much better way for you to understand our business and. I think it's fundamental to the transformation underway at FedEx. Thank you, Brian.

Operator

Our next question is from Bascome Majors of Susquehanna. You generated about $1 billion of free-cash flow-in the first three quarters of the year-on a fully burdened GAAP basis. Can you talk a little bit about with the raised EPS outlook in just 2.5 months left in the fiscal year. What do you think you're going to come out in free-cash flow for fiscal '23 and maybe qualify that with how much of a drag do you think you're seeing on a cash basis for some one-time costs related to the initiatives that you're rolling out to take structural cost-out of the business. Thank you.

Mike Lenz - EVP and Chief Financial Officer

Okay, Bascome, it's Mike. So yes, we've continued to generate solid free-cash flow even amidst the challenged business environment which heightens our emphasis on capital efficiency, and you'll see that going-forward across-the-board. Sorry, what was the last part of your question. Oh sorry, the yes, yes, the onetime cost…

Stephanie Moore - Jefferies - Analyst

On what free cash flow could be, yes.

Mike Lenz - EVP and Chief Financial Officer

Yes, yes, sorry. So the expenses we had that were $120 million for the third-quarter. That's the business optimization that we we identified and about $180 million year-to-date.

Operator

Our next question is from Bruce Chan of Stifel.

Bruce Chan - Stifel - Analyst

Hey, thanks for the time and congratulations everyone. Brie, I maybe just wanted to follow-up on your comments about the higher capture on the GRI in Europe. I guess I'm a little surprised by that given the softer demand environment. Can you maybe just give us a sense of what's driving that GRI capture, is it just having a fully-integrated network now or maybe something else.

Brie Carere - EVP and Chief Customer Officer

Yes, hey it's a very fair question. From a European perspective. I do think it's important to remind everybody that we have a very unique value proposition in Europe. There real stickiness with the parcel and the freight bundle and also our sales and our customer service team do an incredible job with very personalized and social or solution-oriented selling. So for the customer-base that is there, it is sticky they value the bundle. We've got opportunity to take profitable share, but I think the ability to get that GRI capture really emphasizes the loyalty that we do have in that customer-base. And honestly, an opportunity to go take some more profitable share in Europe.

Operator

Our next question is from David Vernon of Bernstein.

David Vernon - Bernstein - Analyst

Hey, good afternoon. I look-forward to seeing you guys in a couple of weeks. Roger, Mike, I'd like to talk. I'd like to ask you to talk a little bit more about the fleet strategy going-forward. I know you mentioned the attention to park the MD-11s. We're running 422 trunk aircraft right now, if we were to kind of run this volume in the new fleet design, how big of an aircraft fleet would you guys have. I'm just trying to get a sense for and find some way to answer the question I often get from investors, which is how do we how do we underwrite lower capex going forward. Are they just need to replace the 60 aircraft. Thank you.

Raj Subramaniam - President and Chief Executive Officer

So thank you, David. In our fleet modernization strategy that we've been underway has allowed us to build a more agile and flexible fleet and so we come to a fork in the road here, are we going to see a high-demand environment or low demand environment and the MD-11 was that flex fleet. And as we now look at the demand environment, we don't see that high-demand coming through. So we'll look at opportunities to right-size the fleet and this is the normal planning cycle as happens every Q4. So we will update you on those plan as our entire fleet needs finalized here.

Operator

Our next question is from Amit Mehrotra of Deutsche Bank.

Amit Mehrotra - Deutsche Bank - Analyst

Thanks, good afternoon everybody. Mike. I just wanted to ask a question on express margins is coming back to it a little bit, because. If. I look at the, the range of outcomes over the last couple of years, it's been as high as. 9.2%, it's been as low as 1.2%, which you just reported. And it's your biggest business and. I really don't have any clue what Express margins could be next year and. I was hoping you can kind of help us think about that. If macro kind of stays where it is today, and. What's the right way to think about the recovery in Express margins next year. And then kind of related to that, one of the criticisms from the Investor Day was the Q&A. It wasn't really - didn't have a lot of, how do I say, detail around the bottom-up strategy, the cadence of the pathway to the improvement. So as you guys think about DRIVE day, is incorporated in DRIVE day a cadence of margin improvement by each division, so we can you know everybody can be held accountable for the plan as it stands, when you present it. Thank you.

Mike Lenz - EVP and Chief Financial Officer

Sure Amit, let me address aspects of that. So first, the way we have structured the DRIVE framework is that, we have 12 domains with individuals assigned to each of those that are accountable and on the realization of the opportunities that are identified there and of course there is multiple teams and there's multiple sub initiatives under that to enable those outcomes. But to the question of how do we measure and have accountability that is definitely the structure and framework that we have in-place. To your question about Express margin and profit volatility that's precisely what Raj was highlighting is the primary focus is to make the business more agile, more flexible with the various deployment of technology making our fleet more flexible, so that we can react and adjust. So, certainly realize that we need to build from here and fully anticipate that going-forward, and we will be relentlessly focused on that across-the-board.

Operator

Our next question is from Ravi Shanker of Morgan Stanley.

Ravi Shanker - Morgan Stanley - Analyst

Thanks, good afternoon everyone. Couple of follow-ups here. Just on-the-ground actions in the third-quarter, that kind of helped drive the margin higher-than-expected. Can you help us understand if these are a permanent change in the way you treat peak season or even a permanent change in the way ground is on every quarter or was it just a reaction to obviously peak season this time-being less robust than it was the last two years. I'm trying to get a sense of whether it was just a tactical move when you guys kind of pivoted very quickly in the market or if it's more of a permanent change in the way you deal with peak season.

Mike Lenz - EVP and Chief Financial Officer

No Ravi, it's is definitely illustrates the discipline, rigor and focus, we have around responding adjusting to changes in the volume environment, running an efficient network and adjusting in short order. Again, I'd highlight last year was– quite frankly, the last two years were quite unprecedented in terms of ability to both projected understand demand because our customers themselves were -had a lot of uncertainty, amidst the dynamics of the pandemic. And we sometimes skip over it, but have prefunded of the labor availability and the immediate cost increases in terms of higher wage rates that were experienced at Ground can be diminished. But this is a rigor and discipline that as Brie said, it also supports our service levels across the board too. So, it's a virtuous cycle there that will build upon going forward. Our next question is from Jeff Kauffman Vertical Research Partners. Thank you very much. Question for Brie. Brie we were out talking to different customers and some had indicated to us that they were a little concerned about the potential for labour action at one of your competitors and have begun shipping with you guys, which is something that normally do. I was just wondering, I guess a, we could look at this is how it's a short-term thing be we could look at this is, it's an opportunity to bring in some new customers and I was told that you had to be shipping at certain levels to be available if there was a problem and there was a lack of capacity. Could you talk about how you're engaging some of these customers that may be coming to you and saying, hey I'm nervous. Can I get some capacity or can I come over? Are you requiring them to stay on for a year? How do we make this more than just a short-term use of excess capacity in your network.

Brie Carere - EVP and Chief Customer Officer

Hey Jeff, thanks for the question. So, I think first and foremost is that our primary goal is to maintain and improve the service momentum that we've created. And so as we think about any potential exogenous factor in the market that might put stress in the market. Our goal is to protect our customers and to make sure that we're there for them. So absolutely, as customers are inquiring about available capacity at FedEx. We have been really clear that, yes, of course, we would entertain any good business, and we'd love to talk to them. We do need to have that business on board and those contract signed by the end of March. We are not going to put or staff up like this is a peak factor. We are going to plan for long-term partnerships with customers. And anybody that wants to come and enjoy the FedEx value proposition, we're happy to talk to them prior to March 31.

Operator

This concludes the question and answer portion of today's call… Thank you, operator. Please continue Mr. Subramaniam.

Raj Subramaniam - President and Chief Executive Officer

Well, thank you, operator. In closing, I want to thank our team members as FedEx was once again the only delivery company ranked in the top 20 of the Fortune was Most Admired Companies. We also were named earlier this week, as one of the world's most ethical companies by Ethisphere. This recognition would not have been possible without the commitment and dedication of our people around the world. And as we celebrate our 50th anniversary next month, I'm most excited about the ways that this team will continue to innovate and deliver for the next 50 years. Thank you very much.

Operator

This concludes today's FedEx Corporation third quarter fiscal Year 2023 earnings call and webcast.

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Q3 2023

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