Good day, and welcome to the FedEx Fiscal Year 2025 First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings release, Form 10-Q and stat book are available on our website at investors.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. 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 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. Joining us on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now, I will turn the call over to Raj.

Thank you, Jeni, and good afternoon. Our results reflect a challenging Q1 demand environment which was weaker than we expected, particularly in the U.S. domestic package market. Looking at our performance on a year-over-year basis, there are several factors at play. Weakness in the industrial economy pressured our B2B volumes, particularly in the U.S. We saw increasing demand for our lower-yielding services and some of this demand increase was driven by a shift in customer preference worldwide from priority to deferred services. And we continued to execute on structural cost reductions via DRIVE, which partially offset revenue and expense pressure. That said, we now expect the cadence of DRIVE-related savings throughout the year to increase sequentially by quarter. And we had one fewer operating day in the quarter. Notwithstanding this difficult quarter, with the actions we are taking, we remain confident in the trajectory ahead. We are on track to deliver the $4 billion of savings through DRIVE in FY '25 compared to the FY '23 baseline. We have recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit us in the coming quarters. We're making significant progress on our network transformation. We are prepared for the expiration of the U.S. Postal Service contract and we are continuing to roll out Network 2.0. The implementation of Tricolor, which is the re-design of our global air network is well underway. The demand changes we're seeing in the market make Tricolor an even more instrumental element of our longer-term strategy to increase flexibility of our network, lower our cost-to-serve and grow in new profitable markets. Taken together, our network transformation actions will drive improved profitability by unlocking efficiencies, improving density, and creating a more flexible network. This will strengthen our competitive position while simultaneously supporting our…

Thank you, Raj, and good afternoon, everyone. Despite a challenging demand environment, our team continued to deliver high-quality service to our customers. They are drawn to our distinct advantages, including our industry-leading weekend delivery, robust portfolio, and daily weekday delivery in rural areas that the competition simply can't match. Our value proposition continues to attract customers in high-value segments such as healthcare and small and medium business. In the front half of the calendar year 2024, we continued to gain profitable market share in the United States and around the world. Let's review first quarter top-line performance by segment on a year-over-year basis. At Federal Express, revenue declined 1%. This was driven by one fewer operating day and a mix shift toward deferred services. A slightly lower U.S. domestic average daily package volume was offset by higher international export package volume. Yield remained positive, driven by higher base rates and fuel surcharges, with growth partially offset by a tapering of international export demand surcharges. At FedEx Freight, revenue declined 2%, driven by reduced weight per shipment and priority shipment, lower fuel surcharges, and one fewer operating day. Revenue per shipment, however, was up 2%, demonstrating our continued focus on revenue quality. We continue to lead the LTL market in total revenue share while maintaining a great revenue per hundredweight. Turning now to volume trends by service during the quarter. Volumes were pressured, led by weakness in the U.S. market, partially offset by international growth. Across U.S. domestic Express Services, volumes declined 3% due to a weaker B2B demand environment. Ground volumes were slightly higher, driven by a targeted FedEx Ground economy growth strategy. We continue to focus growth on customers who have both a FedEx Ground economy and a FedEx Ground home delivery requirement. This improves both total yield and…

Thank you, Brie, and good afternoon, everyone. As Raj and Brie both mentioned, our first quarter results reflect a more challenging environment, which pressured Q1 profitability despite our ongoing progress to reduce structural costs through DRIVE. I'll start with the Q1 adjusted operating income bridge to help explain the quarterly dynamics on a year-over-year basis. Our first quarter results were negatively affected by soft revenue trends, with a global decline in priority volume and growth in deferred volume. This dynamic pressured our results twofold. First, it constrained yield growth, with total package yield up 1% year-over-year, almost 1 percentage point lower than we expected. Yield was most constrained internationally, with added pressure from more volume in lower-yielding services and reduced demand surcharges. Second, the increase in international economy volume was the primary driver of the $124 million increase in purchase transportation expense at Federal Express. In addition, we had one fewer operating day in the quarter, resulting in an approximately $170 million headwind. We were able to partially offset these headwinds and normal inflationary cost pressures with about $390 million of structural cost savings from DRIVE. As Raj mentioned, we now expect quarterly DRIVE-related savings to build throughout the year. So, while our Q1 DRIVE results were solid, they were below our expectations from a timing standpoint, and will increase sequentially through the remainder of FY '25. All these factors combined resulted in an adjusted operating profit decline of $382 million. Moving to a breakdown by segment. At Federal Express, adjusted operating profit decreased $337 million year-over-year, with $150 million of the decline due to one fewer operating day. The remaining $187 million reduction was a result of the reduced flow-through associated with the revenue softness and the shift toward deferred service offerings partially offset by DRIVE savings. Increased demand…

[Operator Instructions] The first question today is from Brian Ossenbeck with JPMorgan. Please go ahead.

Hi, good evening. Thanks for taking the question. So, just wanted to see if you could give a little bit more color on the negative mix shift. It seems like it's pretty pervasive, but maybe a little bit in the U.S. and also some international. And why do you think you can push through additional demand surcharges, fuel surcharges, and a GRI? So, maybe you can square those two together because it doesn't seem like it's a constructive environment to keep on raising prices to that level. Thank you.

Good afternoon, Brian. It's Brie. Thank you for the question. So, from a pricing perspective obviously, we look at our entire and our collective pricing strategy in each individual component, but then, of course, then holistically. We have been studying kind of the market and the yield, and we're very confident in the capture rate from a GRI that we anticipate in January. From a demand surcharges perspective, I think we have two different factors that we're looking at here. One, we did make the change for the demand surcharge for the domestic market from an e-commerce perspective. As we have kind of talked about over the last couple of years, demand surcharges are necessary to improve the profitability and make sure that we deliver the outstanding service that customers expect, because, of course, this is the most important time of the year for retailers. And this year, we had to make a shift in addition to using demand surcharges for the customers that drive the peaking factors. We had to have a more widespread distribution, but we really are still emphasizing on the customers that drive the increase. So, we're very confident on the capture from a demand perspective. And then fuel, obviously, when we look at the total yield or customer spend from an international perspective, we think that this is the right mix and the right approach to make sure that we are growing our yield. We still believe that the international service at FedEx is just a great value, and so we're very confident from a capture perspective. When we look at, to your point, the demand distribution, I would say from an international perspective, we knew that there would be -- the demand surcharge in international would behave a little differently than the peak surcharges here in the United States, and we had anticipated that. And it was -- actually there was more pressure there in first quarter. We do anticipate that pressure to taper as we go through the year. And what do I mean by that? We can see the strength still in the Asia export market, and we can see the stickiness on demand surcharges. So, we've made some changes there. So, we do expect that that will improve through the year. So, I think that kind of gives you just how we're thinking about the pricing and the mix shift.

The next question is from Jordan Alliger with Goldman Sachs. Please go ahead.

Yes. Hi. I was wondering, you talked about the lower-than-normal second quarter EPS seasonality. Can you give some sense for order of magnitude below normal, and how do you define normal? Is it like a percentage of typical full-year earnings? And I guess following that, what gives confidence on the sharp second half ramp? Is it more of the economy? Is it mix? Is it B2B coming back? Thanks.

Yes. Thanks, Jordan. It's John. And we're really not in a position to give quarterly guidance, but what I can share with you is our expected cadence. So, regarding our expected earnings cadence for Q2, as we talked about, we're going to experience the U.S. Postal Service contract termination. That will be a headwind that begins in Q2. And we also anticipate a negative effect in Q2 from the timing of Cyber Week. So, that's going to push into Q3. So, overall, from an EPS perspective, we expect lower-than-normal seasonality in Q2 and better-than-normal seasonality in the fiscal second half of the year. And to your question, supporting our view on this is the ramp-up in DRIVE savings as well as the revenue actions, really tangible, meaningful revenue actions that Brie talked about. So, that's why we're focused on certainly the whole year, but that upside in the second half.

Thank you.

The next question is from Jonathan Chappell with Evercore. Please go ahead.

Thank you. Good afternoon. John, kind of sticking with that theme, you noted the $390 million in DRIVE in the first quarter was lower than what you anticipated. So, can you help us understand why that fell short of your first quarter target? And if you're not -- and if you can't give the cadence quarterly from here, or at least how much is going to be back half-weighted, what gives us the confidence that the $2.2 billion is still attainable when coming off a quarter when the quarterly target can be hit?

Yes, thanks. Thanks, Jonathan. Look, we had a lot of positive momentum coming through Q4 of last year -- last fiscal year and into the first quarter. And as many of you may have heard me say in the past, with regard to these DRIVE initiatives, many of them over-deliver, some of them under-deliver, some of them produce on time, some perhaps a little later in time. What I can tell you is, there's a very robust DRIVE process. And we feel very strongly that while we're pleased with the $390 million that we delivered, we would have liked to have seen more based on that positive momentum. But we're committed to the $2.2 billion for the fiscal year. And I'll just also refer to the $1.8 billion from last year. We laid that marker down and we delivered on it. I personally, as well as other members of the senior team, sit on the DRIVE initiative sessions which occur every week. So, that's really what gives me the confidence, seeing the progress, seeing the commitment of the teams, and frankly, the strong pipeline of initiatives that are delivered every week. And so it's an evolving exercise, but at the same time, we're committed to those numbers.

The next question is from Tom Wadewitz with UBS. Please go ahead.

Yes. Good afternoon. I wanted to ask you about some of the pressure from purchase transportation costs that were up quite a bit. I think you alluded to them being driven somewhat by international economy growth. So, I mean, I guess the question is, is there something that's a little bit wrong right now with international economy that you're not making money with it, or it's just like calibrated wrong? Because it seems like that's part of the problem with PT going up. So, yes, how do we think about IE and also the equation for PT expense to be more manageable and less of a drag on margin? Thank you.

Sure. Thanks, Tom. So, yes, as mentioned, the purchase transportation costs did increase. And really, there are three major drivers of this absolute expense increase. And first, I'll note that the PT included $130 million of year-over-year increase, which was from higher freight forwarding revenue in our logistics operating segment. And this increase in purchase transportation expense was directly related to increase in revenue at logistics. So, that's the first element. Second, with regard to Federal Express, most of our PT spend is related to our contracted service provider pickup and delivery, surface linehaul spend both in the U.S. and internationally. And the remainder at FEC is driven by air commercial linehaul. So, in the ordinary course, it's important to note that this is a $4.7 billion-plus spend line item. And the ordinary course increases in our rates amounted to about $140 million of PT expense increase. That was partially offset by the efficiency gains, and of course, one fewer operating day. So, that's the second element. And then finally, the third, the $120 million of PT expense was additional commercial airline haul capacity, which ties in with your point on the international economy, as well as some investment in Tricolor. But what I can say is that those volumes were contributory to the year-over-year profit. So, little pressure on margin, but they were contributory and not loss-making. So, hopefully that gives you some clarity on that.

The next question is from Daniel Imbro with Stephens. Please go ahead.

Yes, thanks. Good evening, guys. I want to ask one on the FedEx Freight side. So, you guys have been closing locations for a little while. You closed some more here on 1Q. I guess, how are you thinking, John, about capital deployment towards that segment and actually reinvesting into growth? And then as it relates to the strategic review, as far as I understand, by year-end, we'll get the update. But what are the factors you guys are still digging into as you decide what's the best decision for this asset over time? Thanks.

Sure. Thanks for that question. Yes, with regard to freight, it's absolutely part of our capital investment program and our plan. As I mentioned in my remarks, we're looking to invest in those areas of the business that's going to provide the best ROIC, and freight is certainly one of them. We feel really good about our investment on the air side in our fleet. In fact, that spend is coming down, and that allows us some capital to deploy into some of the other areas of the business, and freight is absolutely one of them. So, we'll stay tuned on terms of the details on that. But from a capital standpoint, we're going to continue to manage our capital intensity. I think from my perspective, on a year-over-year basis, that's a really good news story. We saw both flat expectations year-over-year, as well as some sequential reductions from Q4 of last year. And so facilities are definitely a part of it. It's all part of our integrated plan on One FedEx and Network 2.0 as well.

Hi, Daniel, it's Brie. The only other thing that I would like to add is I just wanted to make sure there was an assumption in that question that we were constraining growth at FedEx Freight because of capital allocation. That is not at all the case. Obviously, there's a tough freight environment right now, but Lance, John, and I are very committed to profitably growing the FedEx Freight portfolio, and we feel really good about our value proposition. So, we are looking always for dock door expansion in the right markets, and when we make closures, they simply just were not in the right place from a growth perspective.

The next question is from Chris Wetherbee from Wells Fargo. Please go ahead.

Hi, thanks. Just as we're thinking of trying to calibrate a little bit appropriately here, John, maybe if you could help us on the second quarter, just is there enough in terms of the walk as you move from 1Q to 2Q for earnings to be up sequentially, I guess, would maybe be the first question. And I guess maybe for Brie, just very quickly on the pricing side. Obviously, some big peak season surcharges that have come --been announced so far, I guess. How do you think about sort of the compliance or capture rate around that and any sort of early indications you're having from your customers on the likelihood of that kind of coming to fruition?

Yes, thanks, Chris. I'll take the first part of that and then turn it over to Brie. Yes, but on a sequential basis, when we talk about the revenue actions and the pricing actions that Brie talked about, coupled with the DRIVE savings that we expect and are committed to, yes, we see definitely the opportunity for sequential quarter-over-quarter profit improvement.

Hi, Chris. From a demand surcharge perspective, obviously, we've got several years of track record and also our large customer peak surcharges are already pre-negotiated, so I feel pretty good from a capture perspective there. We have, to your point, changed methodologies a little bit. I think we've been conservative in our estimate on the capture right there, and that is reflected already in the range provided. So, I think we've got the right balance. I am optimistic about the capture because I think customers do understand that there's a lot of pressure on the network, especially this year. If you think about the shopping period for this year, there's five less shopping days, which means there's three less operating days, and so it really is a condensed peak period, and I think our customers understand that and therefore understand the broader approach from a peak demand perspective.

The next question is from Stephanie Moore with Jefferies. Please go ahead.

Hi, good afternoon. Thank you. Maybe taking a step back here, looking at the quarter, clearly, some challenges outside of your control, really, that you called out impacting the top-line and kind of the full-year expectations, but if you kind of look at the performance of the quarter given it was a bit more of a challenging top-line environment, still saw a pretty material impact to overall earnings kind of going quarter to quarter here, 4Q to 1Q. So, as you think about your ability to kind of flex your network and adjust to maybe some of these challenges that can pop up intra quarter, how would you kind of rate your performance? And if you think back, is there something that should have been done differently? DRIVE savings, you obviously have called out? But just as, again, you can flex your network. Maybe just some insight there would be helpful. Thanks.

Yes. Thanks, Stephanie. It's John. Yes, no, it's a great question, and I think the team does an excellent job of monitoring the demand trends and adjusting as best we can. Pretty dramatic changes, though, when you talk about the mix shift that we experienced. And the volumes were there. Volumes were, for the most part, pretty strong, and when you're operating such an expansive network, it takes a little bit of time to adjust, but we're looking at that every day and, frankly, every week and making schedule adjustments. And, frankly, as we look forward here, as part of the winding down of the Postal Service contract, I think we're going to have some additional flexibility to continue to create the network of the future, which is going to allow for some additional efficiencies and flexibility. So, we're optimistic about that, but when, again, you're talking about a large network, it's tough to flip a switch, if you will. But I think the team does a great job of monitoring that and adjusting.

The next question is from Brandon Oglenski with Barclays. Please go ahead.

Hi, good afternoon, and thanks for taking the question. Raj, I guess if I listen to the call only, it sounds like DRIVE is working, FedEx One is well underway. The Tricolor initiative is supposedly delivering profitable market share. But -- and I guess it's kind of just feeding off that last question. The reality is this is one of the lowest profit first quarters that we've seen since maybe 2009. And EPS is very much run rating well below your full year range here. So, I think it's just -- it's really hard to get credibility with investors with these types of numbers and with costs that are actually up, even though supposedly DRIVE is underway. So, I don't know, can you just give us some concrete examples of what's going to change? I get it, the post office contract is going away, then taking down daytime flying in a step in the right direction. But incrementally, how do we get to that much higher earnings run rate?

Well, thank you, Brandon, for that question. I will just start by saying, yes, this point that we just talked about before, the soft industrial economy is clearly weighing on the B2B volumes. And it was definitely much weaker than we expected, and we have to make adjustments accordingly. And as you know, shipments linked to industrial production are highest yielding and the most profitable. At the same time, e-commerce is resetting and starting to grow again. And we're also seeing some modest improvements in global trade. So, the dynamics of the profile of our traffic changed. Having said all this, we're absolutely focused on what we can control. And this is the mantra that we have preached over the past two years, and we have got real good success that we have demonstrated over several quarters. We have a very, very deep sense of urgency in executing our structural cost reduction programs. You can take that to the bank. We have revenue quality initiatives that Brie talked about. We have profitable growth opportunities that we are lining up as well. And everything, I mean, everything is now being done with the rigor and the discipline of DRIVE. This is a proven method of success, and I'm very confident that our execution will get us to support our FY '25 guidance. I'm going to turn it to John to talk about any -- specifically some examples on the DRIVE side and maybe Brie on the growth side.

Sure, Raj. Thank you. So, again, across the board, as we look at surface operations, for example, we're going to continue to optimize our staffing and enhance efficiencies across all our segments, frankly. And the implementation of some of our technology tools is going to facilitate not only present day, but also as we look forward into Network 2.0, it's going to be a key element of that. On the air network, we're looking at the entire network. I mentioned what we're able to do once we're relieved of the Postal Service flying, but our air network, there's more we can do in Europe. There's more we can do internationally and matching the size of aircraft, the gauge of aircraft with the demand profiles, there's a lot of great work being done there. Europe is another area where we're going to be able to have, as Raj mentioned in his initial comments, some opportunity there and leveraging not only the DRIVE initiatives, but as Raj mentioned, it's a significant ground operation there and we're leveraging the expertise of what we do exceptionally well here in the U.S. to facilitate and continue to improve what we're doing in Europe. And then the progress we're making on G&A is significant. As we're bringing the OpCo's together, just from a procurement standpoint, I mentioned IT, there's a lot of great work being done of which there's more to do, but we're getting benefit from leveraging our scale on procurement and centralizing that and just a whole number of initiatives that are going to contribute to the rest of the year as well as delivering on the $2.2 billion.

Brandon, the only thing that I will add, as we talked about kind of the plans that we have for demand surcharges as well as the fuel surcharge table changes, both the domestic change and the international change, not all of this was planned or in our original assumptions come June. So, that is additive. The impact, there absolutely is impacting Q2, but the majority of the impact will happen in Q3 given just the distribution of peak and then of course our GRI. So, that gives us great context -- or sorry, great confidence because we can forecast this with a lot of granularity. And then I think just additive to what John said, as we look at our European pricing strategy, as I've talked about, we are taking a lot of our tools and capabilities from the U.S. into Europe to improve their profitability and their pricing capture. Dimensional capture is significant for Europe because remember they do have a sizable intra-European freight business and getting all dimensional capture both there and large package for parcel is incredibly important to that business. And you can see some of the discipline improving, the international domestic yields did improve. And of course that is a big part of the Europe business. So, I'm very confident in not only what we've announced, but some of the things that we have coming for Europe.

The next question is from Jason Seidl with TD Cowen. Please go ahead.

Hi, thank you for taking my question. How should we think about the overall macro? I mean, we've seen a very weak industrial environment. You guys seem to point to a weaker parcel volumes and then even a trade-down, I guess what's in your assumptions going forward for the overall macro? And then as a follow-up, if there is a strike on the East Coast ports and Gulf, how could that potentially impact any air freight volumes you might say?

Okay. Thank you, Jason, for the question. The -- clearly, this quarter, the industrial economy is weighing our B2B volumes and the S&P U.S. manufacturing PMI dipped 1.7 points to 47.9, is the lowest reading of the year. And at the same time, e-commerce is resetting and starting to grow again. As of Q2, CY '24 e-commerce was 16% of retail sales, which is up from 15.8% in Q1. And also we're also seeing modest improvement in the global trade data. The trade was up 1.8% year-over-year in June and bringing the growth for H1 CY '24 to 0.9%. So, this has been driven out of Asia. To give you some idea, the magnitude of the Fed rate cuts yesterday signals the weakness of the current environment. Now we're not assuming a significant comeback on the industrial environment in the rest of this calendar year. We're cautiously optimistic that industrial production will moderately improve in the second half, but we are dialing in pretty low growth expectations at this point because of the environment we are seeing. Once again, let me just say this, that we remain focused on what we can control. And that is really critical for us. And the action we're taking on executing our structural cost savings or our revenue initiatives and growth initiatives are absolutely critical. And we are confident we'll deliver on the guidance that we give you.

And Jason, if I could, you had asked about the port disruption and my experience is, anytime you have some port disruption, it generally favors air freight. So, we'll be watching that closely. And keep you posted on that.

The next question is from Conor Cunningham with Melius Research. Please go ahead. Mr. Cunningham, is your phone on mute? Move on to the next question is Scott Group with Wolfe Research. Please go ahead.

Hi, thanks, afternoon guys. I'm in an airport, so sorry about any background noise. Raj, I know we're not through the review yet for LTL, but maybe just talk, what are the puts and takes, the pros and cons? And if you can say, are you -- do you feel like it's more or less likely that you move forward with a sale or spin? And while we're on this topic of like strategic reviews, is there a point where you think about strategic options for the Europe business if we can't get back to profitability?

So, Scott, I'll take the first one. As Raj mentioned in his remarks, the assessment is well underway and we're on track to complete it and communicate the outcome of that by the end of the calendar year.

Okay. And on Europe, let me just say this much. Europe is the top priority for the executive team and we have a long runway of profit improvement there. In fact, the entire exec committee was in the continent in June to show the support for the team. Our focus is on capturing profitable share while at the same time improving our cost profile. In fact, in FY '24, we saw the financial performance in Europe improve year-over-year. We're seeing improvement in service levels, the commercial execution, driving profitable share gains, and the service levels have been highest in the -- than in the past three years. Now, as we've just talked about before, I mean, Europe is primarily a ground and freight business. And as we are sure in the U.S., we know how to run a very profitable surface network. And we are taking these learnings from the U.S. and applying it to Europe. Over the past few months, we've done an incredible amount of work in deciding the right physical and technological solutions to enable the streamlined flow of packages and pallets across our intra-European road network. And now this is being put into action. And our U.S. domestic surface executive management team is directly involved and intricately involved in the optimization of the European service network. So, with that, we're going to drive improvement in Europe, again, managed through the DRIVE process. We'll improve the station and hub efficiency. We'll optimize the linehaul and last mile density. We will continue to improve on our G&A and back office savings. As we talked about, implement dimensional pricing for European freight products. And we've put in place a revised organization structure, which added expertise from the U.S. service team. We are confident of this now in Europe, and we are expecting improvement of $600 million over FY '23 as part of DRIVE. And we're confident that we have the right leadership in place with Wouter at the helm. So, thank you for that question, Scott.

The next question is from David Vernon with Bernstein. Please go ahead. Mr. Vernon, is your line on mute?

Hi, sorry about that. I was in an airport. I was trying to keep the background noise down. So, John, if you think about the cadence of earnings for the remainder of FY '25, $16.90 or so, can you give us a sense for how much of that is front versus backend loaded? And then I know you can't really talk much about beyond the fact that the freight review is ongoing, but there's been some discussion in the market about whether the freight margins as they're reported within your Company costs would be similar to what they might be kind of coming out if it was a standalone business. Can you just talk conceptually whether the intercompany costs that are charged to the freight business right now sort of accurately reflect what a burden might be if you had to equip it with a sales force, for example? Thank you.

Yes, thanks, David. Yes, I'm not going to comment further on freight. There's a comprehensive assessment taking place that takes all those things into account, and we'll look forward to reporting back on that. Now, with regard to the cadence, as I said, we're expecting Q2 to be, from a seasonal standpoint below seasonality, and it's going to be back half sequentially. We're going to see continued improvement through the year. And that includes our DRIVE initiatives as well as our profitability initiatives. So, thank you.

The next question is from Bruce Chan with Stifel. Please go ahead.

Hi, good evening, everyone. You made a couple of mentions of the strong Asia export volumes. Can we just maybe level set on how much of that is coming from the big two or three Chinese e-comm players and how you're thinking about those volumes heading into peak season? And then maybe just to follow up, if we think about these players taking down a lot of capacity during peak season and maybe pushing air freight costs upwards, what's the sort of net impact here with Tricolor? I'd imagine that there's some tailwind to the Purple Tails, but maybe there's continued PT pressure on some of the other colors. So, just maybe some thoughts on how we should think about that.

Hi, Bruce, it's Brie. I think I've got it all. So, as we think about Asia export for the rest of the fiscal year, we are expecting sort of continued strength based on what we saw in Q1 from a seasonality. Yes, of course, we will have some seasonal improvement in the peak period coming out of Asia, but we think that the volumes will remain very similar kind of seasonally throughout the year. With regards to the big two, we have very productive relationships with them. However, we've also been very strategic in making sure that the relationship is mutually beneficial. What do I mean by that? Obviously, these are two massive shippers coming out of the Asia market, and we have found, I would say, small opportunities to work together relative to our overall Asia business. So, we're really happy with the relationship. They are accretive, but we have really focused on the parts of their business where they do need speed and/or where we have available capacity coming into the United States. So, we're happy with these relationships. They will not be a significant growth driver for us, and we're not planning on that. We also do not see any sort of material risk coming out of peak as a result either. And I guess I should say from a Tricolor perspective, just the last part of your question, we absolutely expect that improved Tricolor optimization that John has covered earlier will continue to improve all of our international margins. We really have to think about the Tricolor being the right strategy for the entire international system form as we anticipate that deferred volumes will continue to be the largest growth driver in the industry.

The final question today comes from Ken Hoexter with Bank of America. Please go ahead.

Great. Thanks for squeezing me at the end. I guess maybe just there's still, it seems to be a bit of confusion based on a lot of questions coming in, just on the margin outlook, right? So, if you're -- well, I guess one, sequentially, John, you did say it's going to be up both sequentially and year-over-year, right? I think you threw the two things together. But if Raj, I guess if we're talking about 5% combined margins now, is the economic economy service a negative margin business that is dragging you down? If international is still losing money, does the $600 million you're talking about get you to break-even versus peers at 20%? Maybe you can talk about kind of where does this go once you're done with the DRIVE savings, before Network 2.0, but what is the flow-through that we can kind of expect on a net basis?

So, Ken, I'll start with that. I believe I said sequential. I didn't -- I don't believe I said year-over-year, so just that one clarification. And so again, from -- we're not going to be providing quarterly guidance, but for modeling purposes, we're anticipating freight margins to be down for the full year due to the challenging U.S. domestic industrial economy. And we do anticipate adjusted FEC margins to be up for FY '25 driven by DRIVE and the recent pricing actions, which will support profitable growth.

And let me just add, Ken, that the items that you just talked about, and let me just recap, with Network 2.0 coming into play in the horizon we're talking about in the next couple of years, improvements that we are seeing in Europe and that'll continue on, the Tricolor will be a huge advantage as we restructure the system. These are all accretive to the FedEx story as we move forward here. And so, as we complete the $4 billion of DRIVE savings in fiscal '25, we still have significant drivers of profitable expansion for FedEx even this year and for some time in the future.

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Thank you very much. As you know, we faced a very difficult quarter marked by weaker-than-expected demand environment. However, because of the execution focus that we have, I remain confident in the value-creation opportunities ahead. We are focused on delivering structural cost reduction through DRIVE and executing our network transformation plans. And this efforts will lead to a more flexible, efficient, and intelligent network. Once again, let me thank the FedEx team members for their hard work and dedication in delivering outstanding customer experience, as we prepare for the peak season. And thank you all for your time and attention today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.