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Raj Subramaniam

Thanks, Jeni. We are in the home stretch of peak, and I want to begin by thanking our team members for their hard work and dedication as we deliver an outstanding holiday season for our customers.
Today marks an important step in our transformation. Following our assessment of FedEx Freight, which we announced and commenced back in June, we have decided to pursue a full separation of this business which will result in two industry-leading public companies. Through the separation, we believe we will unlock significant value for stockholders while allowing for continued commercial, operational and technological cooperation between both businesses.
The separation will also enable both companies to benefit from enhanced focus and competitiveness. For FedEx, this will ensure strong execution of our near- and longer-term strategic priorities while preserving the benefits Freight and FedEx enjoy their long-standing connectivity.
Each independent company will be well capitalized with flexibility to invest in profitable growth while continuing to return capital to shareholders. I would like to provide a brief overview on the compelling value proposition of both businesses, starting with FedEx Freight.
We're excited to create a leading LTL pure play, the largest carrier by revenue with the broadest network and the fastest transit times. FedEx Freight has deep relationships with customers who turn to us or our reliability, simplicity and choice of services.
Freight has maintained its leading market share position for a long time and increased operating profit nearly 25% on average per year over the last five years, expanding operating margin by approximately 1,100 basis points. The team's focus on safety, facility utilization, revenue quality and operational efficiency has driven this performance, and these factors will continue to guide Freight's go-forward strategy supported by a strong balance sheet.
As a separate company, Freight will be better positioned to unlock its full value potential. Areas where we see the greatest opportunity include First, an expanded dedicated LTL sales force led by Tom Connolly, our new VP of LTL sales was nearly 30 years of experience. We've already begun to build out this team and we expect to add more than 300 LTL specialists by the time of separation.
Second, an enhanced LTL specific pricing and invoicing system that drives faster speed to market more intuitive contracts and is more tailored to this particular market. Third, improved freight and FedEx network efficiencies focused on accelerating speed, improving coverage, optimizing touches and lowering our cost to serve.
And fourth, an LTL-focused automation, which will drive efficiency and reduce outside vendor spend.
FedEx Freight's portfolio of solutions, which includes both priority and economy services, is also well positioned to benefit from the long-term market dynamics shaping the LTL industry. As we pursue the separation, we will remain focused on customer experience by sustaining or improving service to our customers.
To ensure the focus and seamless transition, Lance Moll will continue to serve as President of FedEx Freight as we execute on our separation. The long-standing cooperation between FedEx and FedEx Freight will continue through commercial, operational and data and technology agreements to enable seamless continuity of service and capture existing benefits from the relationship.
We have an unmatched customer value proposition with two separate companies, we will ensure commercial collaboration that creates a seamless transition for our customers, especially those that turn to FedEx for all three services. From an operational perspective, in addition to the network efficiencies I mentioned earlier, Freight will continue to provide line haul for FedEx strategically including Tricolor, peaks and trade support.
This requires minimal change as freight already receives a direct financial benefit from supporting Federal Express via intercompany agreements. Additionally, we will implement shared technology and service agreements to facilitate the transition and beyond. Through these agreements, FedEx will provide freight with tech platforms that effectively connect the two businesses as needed and ensure business community.
Given the strong reputation and familiarity of our brand, we plan for the new company to continue to operate under the FedEx Freight name.
Putting all of this together, customers will continue to enjoy the superior service speed and coverage they have come to expect from FedEx Freight while also maintaining access to the unparalleled global ecosystem of FedEx Services.
Now turning to FedEx. We pioneered the express transportation industry over 50 years ago and remain the industry leader today. Customers choose us for our advantaged value proposition enabled by our service, speed and breadth of coverage. We delivered nearly 17 million packages each business day to over 220 countries and territories, we link more than 99% of the world's GDP.
We transport approximately $2 trillion worth of goods every year by connecting 3 million shippers to 225 million consumers. In the US, our weakened and rural coverage also serves competitive advantage. And we generate over 1 petabyte of data every single day, which provide insights that drive how we run our company more efficiently how we serve our customers and how our customers manage their own supply chains.
The ongoing progress at FedEx gives me confidence that this stand-alone business will continue to thrive into the future. During and post separation, we will continue to focus on delivering significant value to stockholders through our strategic initiatives, which are cementing our leadership position as the world's best transportation and supply chain technology company.
This includes Drive, which continues to change the way we work. We are on track to deliver $4 billion in savings by the end of FY25 and versus the FY23 baseline. Network 2.0, which will deliver on the promise of a more efficient network, including one truck, one neighborhood, along with consolidated facilities where we are targeting $2 billion in savings by the end of FY27.
Tricolor, the redesign of our global air network, which positions us for strategic growth while improving the efficiency and asset utilization of the entire FedEx system. As a separate company, FedEx will strengthen its leading value proposition with an emphasis on delivering outstanding service, continuing to provide a differentiated offering in premium segments and remaining focused on higher-yielding service and building on our technology ecosystem to create smarter supply chains for all.
Our capital allocation priorities remain unchanged. We will prioritize maintaining a strong balance sheet and investment-grade profile. We will continue to make high return investments in the business, while reducing capital intensity and increasing stockholder returns through buybacks and dividends.
Looking ahead, we expect to execute the separation within approximately 18 months. Claude Russ will lead our separation management office bringing the dry rigor and the accountability that we use to run our operations. Claude has spent nearly 25 years at FedEx as the former CFO of FedEx Freight is well worked in our freight business and the LTL market dynamics.
Claude is currently Enterprise VP of Finance and has been a critical enabler of our drive execution. Today, we have shared the outcome of the assessment in our initial plans. As we have new details and separation milestones to share, we will keep you updated. Upon completion, this full separation will result in two strong, well-capitalized industry leaders.
FedEx Freight, which will benefit from continued strategic and operational competitiveness and more flexible capital allocation. And FedEx, well positioned to continue executing on our strategic initiatives in pursuit of sustainable profitable growth. We're confident the separation is the right strategic decision for FedEx and FedEx Freight at this point in our evolution, with a clear path ahead to create significant long-term stockholder value.
Importantly, for our employees and our customers, it's business as usual as we look forward to a seamless transition. We are used to navigating change and we will do it while continuing to deliver on the Purple Promise every single day.
Now turning to our Q2 results. Looking across the enterprise, we delivered sequential improvement both in drive savings and adjusted operating profit. At Federal Express Corporation, we achieved strong results on a year-over-year basis and greater flow-through to the bottom line with adjusted operating profit up 13% on essentially flat revenue.
We did this despite the challenging demand environment as well as headwinds we have previously identified, including the US post service contract expiration and the timing shift of Cyber Week. This is evidence that our transformation is clearly working.
Similar to last quarter, we experienced weakness in the industrial economy, which negatively affected our B2B volumes, particularly in the US domestic package and the LTL markets. continued market pressure, coupled with difficult year-over-year comparisons weighed on our freight segment in the second quarter.
With B2B revenues comprising nearly 60% of our package business and 90% of our LTL business, we are well positioned for profitable growth when the industrial economy recovers. Against this backdrop and in support of evolving market dynamics, we continue to create a more flexible, efficient and intelligent FedEx as we deliver for our customers.
We achieved drive savings of $540 million in Q2. We remain confident that we will deliver our targeted $2.2 billion in incremental savings in FY25. Our Network 2.0 rollout continues and the Canadian market integration will be largely complete in early calendar year '25.
With the expiration of the US postal service contract, we're strategically matching capacity with demand and flexing the network as needed to transport packages more efficiently. At the end of September, we reduced our US domestic daytime flight hours by nearly 60% and strictly began to reduce other associated costs.
And we delivered solid service for our customers. This is always our priority and especially important during peak. I'm very pleased with how our teams are navigating a condensed period between Thanksgiving and Christmas.
So far during peak, they're delivering more packages per day on average while maintaining the high-quality shipping experience that our customers expect with the ground average time in transit at two days in the US this peak.
As we look to the second half of the fiscal year, we remain focused on what is within our control. executing against our transformation initiatives to reduce our cost to serve and drive improved performance. However, amid continued uncertainty around the demand environment, we are updating our expectations for FY25.
We now expect an adjusted EPS outlook range of $19 to $20. John will provide more color on the underlying assumptions shortly.
Turning to Drive. On past earnings calls, I've talked about Drive at our structural cost optimization program. The reality is that within FedEx drive is Vale to be so much more. It's a new data and technology-driven business architecture that has changed how we work across our entire enterprise. Introducing more rigor and accountability to every decision we make, leading to a continuous cycle of efficiency and optimization.
Take Europe, where we expect to achieve $600 million in total drive savings by the end of the fiscal year. Our European business is predominantly a ground-based business. We introduced new European leadership over the summer including a senior operator from our US surface team.
In the spirit of One FedEx, we are bringing hub and sort best practices from US to Europe, and we have achieved many recent wins. Our progress includes revenue growth, which, combined with the drive benefits lead to improved performance this quarter. This gives us confidence in Europe's near- and longer-term trajectory.
Our ability to enhance the financial performance of our European business starts with technology. Having implemented a common data platform, we now have a better view of our European network assets and cost to serve using these insights to increase efficiency in the region.
For example, with our improved routing in Europe via the enhanced data flow, we reduced the number of touches on intra-European packages. This is not only improving productivity, but also expediting clearance, leading to better service. We also introduced dimensional pricing at our Charles Legal hub in Paris.
This enhancement enabled by new and updated technology seamlessly captures package dimensions and wait and that applies and integrates applicable surcharges via standardized processes. As a result, we are now better and more accurately compensated for the goods we transport especially for the higher-margin packages with unique dimensions.
We'll continue to roll out this capability to other European facilities over the next year.
Together with non-stack about shipment surcharges, we expect this initiative to deliver an operating income benefit of over $50 million in FY25. This is a prime example of our new business architecture translating into improved financial and operational outcomes.
Looking ahead across Europe, the team remains focused on deploying the right value proposition and network design, the digital tools that enhance the customer experience and the right processes to deliver this experience efficiently and effectively. Improving our financial performance in Europe is a top priority for our entire leadership team. I'm very encouraged by our recent progress and I'm confident in the opportunity ahead.
In October, just in time for peak, we celebrated the grand opening of a new state-of-the-art sorting facility at our Memphis World Hub. This new sorting facility marks an important milestone in our modernization efforts, improving the work experience for our employees and service for our customers while increasing the efficiency of our hub.
We also continue to roll out network 2.0 in select markets in the first half of Q2, and we have now optimized 200 stations to date. And we are continuing to execute on Tricolor, our international air network design strategy, which is improving density and asset utilization across the enterprise while targeting profitable growth.
Before I close, I want to thank the FedEx team once again as we approach the end of our peak season. They make every FedEx experience outstanding positioning us well through peak and beyond.
Now let me turn the call over to Brie.

Brie Carere

Thank you, Raj. Market conditions remain soft, but our solid service levels, unique value proposition and innovative offerings supported our Q2 performance and have positioned us well for a successful peak season.
Consolidated revenue declined 1% in the quarter, driven by the weak industrial economy. US manufacturing PMI has indicated a contraction for 24 out of the past 25 months representing the second longest downturn in US history. Reviewing each segment on a year-over-year basis now.
At Federal Express, revenue was essentially flat. Higher yields across our services were partially offset by volumes, which declined year over year. We again saw increased demand for our lower-yielding services.
Some of this demand increase was driven by a shift in customer preferences, particularly with the shift from home delivery to ground economy, but the majority was due to organic demand and not related to trade down between services. At FedEx Freight, lower volumes, fuel surcharges, and weight per shipment drove the top line decline.
Year-over-year comparisons were challenging as some customers won last year from the yellow bankruptcy have since left in search of lower prices. That being said, we are ready to capture additional profitable volume when the market returns.
Turning now to volume trends by service during the quarter. Volumes were pressure led by weakness in the US domestic market, partially offset by strong international growth. Across US
Domestic Express Services, volumes declined 1%, primarily due to weakness in the industrial economy. Ground volumes were down 1% as well with the soft B2B environment weighing on ground commercial growth.
While we recognize that e-commerce will continue to outpace B2B growth in the years ahead, we know that the priority customer base is stable with low rates of churn, and the current priority volume weakness reflects the state of the broader global macroeconomic environment. Ground residential volumes were adversely affected by a difficult comparison due to Cyber Week, which occurred in Q2 last year and is in Q3 this year.
International export package volumes increased 9% in the quarter, driven by international economy, which is largely consistent with recent quarterly trends. Within FEC, average daily pounds were up 10% for International Priority freight and 5% for international economy freight.
This signals early progress from our Tricolor strategy to drive profitable growth in the global airfreight market. At FedEx Freight, the soft industrial economy led to weakness in both weight per shipment down 3% and average daily shipments down 8%. The pricing environment is competitive, but I'm encouraged that revenue quality actions are gaining traction. Revenue quality remains our highest priority as we ensure that revenue growth is benefiting the bottom line.
At Federal Express, composite package yield increased 1%, driven by international priority, US priority, home delivery and ground commercial. Overall yield for ground services was flat with yield growth at home delivery and ground commercial offset by ground economy. As expected, international economy parcel yield declined due to mix and lower weight per shipment.
Moving to Federal Express Freight. Composite Freight yield was up 4%, driven by lower postal service volumes tied to the contract expiration and also successful commercial execution in the international export freight market. At FedEx Freight, revenue per shipment was down 4%, driven by decreased fuel surcharge revenue due to lower fuel prices and lower weight per shipment.
We are through a significant part of peak and project the demand surcharge revenue over this season will be up year over year. I am confident that this pricing strategy is supporting the revenue and profit expectations for the third quarter.
Looking at the second half of fiscal year '25, we anticipate consolidated revenue to be up slightly on a year-over-year basis in both Q3 and Q4. While we still have five days to go, I'm very pleased with December volumes, which are ahead of our forecast. We expect our general rate increase of 5.9%, which goes live in January to have a very strong capture.
Federal Express revenue growth in the back half will be supported by ground residential and international economy volume growth driven in Asia and also through European market share acquisition. We continue to see strong commercial traction, particularly in Europe.
At FedEx Freight, we anticipate revenue to decline slightly in the second half due to continued softness in average daily shipments and modest yield improvement. As Raj mentioned, in January, we began hiring 300 incremental LTL specialists.
We believe this increased focus will provide better support for our customers and enable us to accelerate profitable growth. As we wrap up the calendar year, it's a great time to remind you of our commercial strategy. I am proud to lead the best team in the industry, and I'm confident that the commercial strategy we have in place will drive significant value in the years ahead.
Our strategy is in service of our vision to make supply chain smarter for everyone. For our customers, our mission is to be their unrivaled partner in moving their business forward. To deliver on this mission, we will provide a superior digital portfolio and customer experience. It's essentially the Purple Promise 2.0 powered by the FDX platform.
In fiscal year '26, we will begin the transition of our fedex.com customer base to the SDX platform. This will improve our speed to market and allow us to expose new capabilities like advanced visibility for the millions of FedEx small and medium customers.
We are designing new experiences for high-value segments and planning for above-market growth we already have a differentiated portfolio. Our target segments are B2B for both health care and automotive, domestic e-commerce, global airfreight and of course, Europe.
First, B2B, we have experienced tremendous success in health care, which has been our priority B2B vertical. Federal Express already has a double-digit percentage of our revenue in the fast-growing $70 billion health care segment. And this segment is an important contributor to FedEx profit today.
This fiscal year, we expect to gain market share in the US by leveraging our unique portfolio, including cold chain support, our new quality management program and FedEx Surround monitoring and intervention.
While most of our health care revenue is US-based, the international health care market represents significant opportunity. We will globalize our portfolio and accelerate revenue growth outside of the United States.
Automotive is also a massive market, and we are focused on what we estimate to be a $10 billion market within this industry that requires premium services critical to automotive supply chain. We have created an automotive vertical and expect to provide new benefit in early fiscal year '26.
Our second priority is the US domestic e-commerce market. E-commerce will continue to drive 90% of the market's incremental parcel growth in the years ahead. Within our US ground services, our superior speed and coverage gives FedEx a competitive advantage.
Not to mention picture proof of delivery, which continues to help us close new business. As we execute on Network 2.0, we will continue to lower our cost to serve, which will lead to improved incremental flow-through from these volumes. Our third target segment is the global airfreight market.
This is a market with significant potential. We currently have a low single-digit market share in the $80 billion air freight market. International Priority freight already serves as a profit driver for us.
Our Tricolor strategy is a necessary condition to competing and winning in this market. Commercially, we've also made numerous changes to improve our performance. We have created a dedicated sales organization, a new customer service model and are investing in the digital experience. The airfreight market is fragmented and the shipping processes are antiquated. It's a market right for disruption.
Fourth is Europe. The European parcel market is roughly $130 billion and will continue to grow in the years ahead. Our mix of revenue in Europe is already favorable with the majority coming from B2B. As Raj mentioned, Q2 revenue in Europe grew nicely with strong execution.
Drive continues to transform our cost to serve and improve service on the continent while enabling us to lean into the most attractive parts of the market. Regardless of the target segment, revenue quality and capacity management are critical to growing profitably.
We have made tremendous progress in yield capture in the last several years. A great example, total nonstandard surcharges are generating a significant year-over-year benefit of over $180 million annualized. This is the result of a new AI image capture process.
In calendar year 2025, we will accelerate our work on an end-to-end capacity management system. Within FDX, there is a digital twin of the network. We now have real-time view of the network capacity globally. We will use AI in our digital quote platform to profitably still avoid at a scale and pace that was previously not feasible.
I am very confident about the future as we lean into these commercial priorities. I am proud to be part of the best team in the industry and extend my sincere thank you to the team members as they deliver for our customers this peak season.
And with that, I'll turn it over to John.

John Dietrich

Thank you, Brie. Despite soft market conditions, our Q2 performance demonstrates the team's strong commercial execution and actions to lower our cost to serve. We sequentially grew adjusted operating profit by approximately $170 million and increased our adjusted earnings per share year over year with the growth driven primarily by our Federal Express segment.
And we achieved these results despite revenue declining 1%. Walking through the dynamics of the quarter, the soft global industrial economy, coupled with the competitive pricing environment constrained our results.
The Postal Service contract expiration negatively affected two months of the quarter, resulting in additional operating profit headwind. However, our plans to remove costs associated with this contract expiration are on track.
Drive benefits of $540 million offset these headwinds and supported our consolidated year-over-year adjusted earnings growth. Providing more detail by segment. At Federal Express, we grew adjusted operating income by $146 million year over year as a result of drive savings, base yield improvement and increased international export demand.
We achieved this result despite inflationary pressures and several significant headwinds, including the Postal Service contract expiration a $90 million headwind from the Cyber Week timing shift and a $20 million headwind from the hurricanes in the Southeast US.
As Raj and Brie mentioned, we're pleased that in Europe, our continued network optimization initiatives and strong execution contributed to the profit improvement at Federal Express and the ramping of our Tricolor strategy drove higher average daily pounds and yields year over year for Federal Express international freight.
In Q2, we decreased total US domestic flight hours 24%, largely due to the 60% reduction in daytime flight hours that Raj mentioned due to the expiration of the Postal Service contract. At FedEx Freight, while operating profit was down $179 million, approximately $30 million of this decline was due to our lapping the gain on sales of multiple facilities in Q2 of FY24.
Consistent with the broader LTL market, lower average daily shipments, fuel surcharges and weight per shipment continue to be a headwind, largely due to the soft industrial backdrop. These pressures were partially offset by cost management and continued base yield growth.
Moving to Drive. And as planned, we delivered a sequential improvement in savings in Q2 versus Q1. And G&A savings of $210 million in Q2 were a significant lever in the quarter as we continue to optimize our IT and back office functions and reduce outside vendor spend.
Surface savings of $150 million benefited the quarter as we continued to maximize third-party rail usage, which lowers our cost to serve on our deferred service offerings and adding the $180 million from Air network and international achieved $540 million total savings in the quarter.
As we look to the back half of fiscal 2025, we continue to expect a sequential build in drive savings, and we're encouraged by the trends we're seeing in base yields. However, the global industrial economy continues to constrain demand on our most profitable priority and commercial services. As a result, we are revising our FY25 adjusted diluted EPS outlook to $19 to $20 compared to the prior range of $20 to $21.
At the top end of our range, we assume revenue was up a low single-digit percentage, driven by a modest improvement in industrial production, leading to higher flow-through from B2B demand. At the low end of the range, we're assuming a low single-digit decline in revenue due to incremental softness in the industrial economy and the pricing environment.
Regarding our expected earnings cadence for the second half of the fiscal year, at Federal Express, we anticipate Q3 will benefit from ramping drive savings, improved top line flow-through due to the timing of Cyber Week, continued revenue quality actions and the encouraging peak demand that Brie talked about.
However, as a reminder, the Postal Service headwind is expected to increase in Q3 and will lessen in Q4 as we exit the fiscal year. and the Q3 postal service headwind will more than offset the benefit of the Cyber Week timing shift.
We continue to anticipate drive savings to build incrementally in Q3 and Q4, and with a full year total of $2.2 billion. At FedEx Freight, we expect a continued softness in the US industrial economy and lower fuel prices to pressure op profit for the remainder of FY25.
Finally, our fourth quarter is typically our strongest earnings quarter of the year. We expect this dynamic to continue despite having one fewer operating day in Q4. I'd now like to turn to our latest full-year adjusted operating income bridge, which shows the year-over-year operating profit elements embedded in our revised outlook. This bridge now reflects adjusted operating profit of $6.6 billion, equivalent to $19.50 of adjusted EPS.
For revenue, net of cost, we now expect a $700 million headwind in compared to the $100 million FY25 headwind assumption we shared last quarter. This reflects both our lower revenue assumptions and continued inflationary pressures.
At the same time, we now forecast a $300 million headwind from international export yield pressure, which is an improvement compared to the prior $500 million estimate. This is a result of execution on our revenue quality initiatives internationally. We still expect about a $300 million headwind from two fewer operating days, one that was in Q1 and one that will be in Q4.
And lastly, we anticipate a $500 million headwind from the US Postal Service contract expiration. We remain confident in our ability to offset these headwinds with the $2.2 billion from incremental drive savings. Further supporting this revised outlook is our continued commitment to revenue quality as evidenced by our calendar year '25 general rate increase, peak surcharges and fuel table price changes announced in recent months.
For the full year, we continue to expect year-over-year adjusted operating margin expansion at Federal Express and operating margin contraction at FedEx Freight given the challenging industrial production environment. At the midpoint of our revised FY25 outlook, we are assuming 9.6% adjusted EPS growth on approximately flat revenue.
This expectation further highlights how Drive is fundamentally changing the way we do business. We're improving our cost structure to enable us to profitably grow with e-commerce and are well positioned to see significant incremental margins on our priority services once global industrial production improves. It remains my highest priority to ensure that we continue to unlock the value that I know exists in our business.
Moving to capital allocation. We remain committed to reducing our capital intensity while increasing our capital returns. In Q2, capital expenditures were approximately $820 million. Our planned FY25 CapEx remains $5.2 billion, which is flat on a year-over-year basis, and this will translate into continued strong levels of adjusted free cash flow.
We completed an additional $1 billion in share repurchases in Q2, bringing the year-to-date total to $2 billion, with an additional $500 million of repurchases planned for the fiscal second half.
I remain confident in our near- and long-term ability to grow earnings while continuing to deliver strong levels of adjusted free cash flow, which will support increased shareholder returns in the years ahead.
And with that, let's open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Chris Wetherbee, Wells Fargo.

Chris Wetherbee

Great. Thanks. Good afternoon. Maybe I could just hit on the guidance for a moment. So I think the second quarter results were generally in line with at least what you guys talked about on the last call. So as we think about the dollar cut coming from the back half of the year, I know, John, you talked about the industrial production outlook and maybe how that's a bit more tempered I guess I also wanted to think about LTL or the freight business within that context.
It was obviously under some pressure here. I guess maybe if you could help break down the moving pieces of the dollar in a little bit more detail and then also talk about the cadence of how that plays out? Is it a little bit more 3Q weighted? Or is it a little bit more for weighted? Do you think things get better by the time we get to the end of the fiscal year? Just curious how to think about that.

John Dietrich

So thanks, Chris. I appreciate the question. So as you know, our prior guidance factored in drive savings as well as the pricing actions that we implemented. However, the expected volumes and related revenue just didn't materialize. Our updated adjusted EPS range, which is in the $19 to $20 reflects our revised revenue expectations.
And from a timing standpoint, and while we're not giving quarterly guidance, I can tell you that Q3 will benefit from ramping drive savings, improved top line flow-through due to the timing of Cyber Week that we talked about and continued revenue quality actions.
And as Brie talked about, we're seeing encouraging signs from our peak demand. It's important to remember for Q3, though, that the USPS headwind is expected to increase in Q3 and then somewhat less than in Q4.
But that headwind will more than offset the benefit of the Cyber Week I just mentioned. We continue to anticipate drive savings to build incrementally in Q3 and Q4. And from a Q4 standpoint, that is traditionally our strongest earnings quarter of the year, and we expect this dynamic to hold.
So -- and that's true despite even having one fewer operating day. So hopefully, that gives you some more perspective.

Operator

Ken Hoexter, Bank of America.

Ken Hoexter

Great. And congrats on the freight spend, obviously, long anticipated and a great move to see in value creation. But my question is for Brie. You talked a little bit about peak season here and how it's shifting into third quarter. Maybe can you give a little bit more color on -- you mentioned the peak was strong.
Is there anything we can read into that in terms of volumes ability to get price to flow through? I guess I'm more focused on the volumes, both at Ground and Express? Thanks.

Brie Carere

Hey, Ken. Great question. So from a December perspective, we are pleased. I will say it picked up, right, after Cyber Monday, it was a very strong week, and we are from a December perspective, pleased volumes are running ahead of forecast. And as I mentioned, our peak surcharge capture from an absolute dollar amount will be up year over year. So we do think that December is going to be a very strong month.
That being said, I do want to talk about our top-line outlook for the back half of the year because we do not necessarily believe that the December performance is going to carry through in the back half.
So as we're thinking about the back half top line outlook, we're looking at some improvement. I think you're going to see that improvement come in the form of domestic volumes, in particular, a ground. We think that, that will improve in the back half. We do anticipate that Q2 was the trough.
For FedEx Freight from a revenue perspective and then from an international, actually, what we think we'll see in the back half is that total volume will look a lot like the first half with actually some slight softening in Asia. So we're very pleased with December. The execution is going to be great. The capture is going to be great, but we're not yet thinking that this is a signal of more to come in the back half.

Operator

Ari Rosa, Citigroup.

Ariel Rosa

Hey. Good afternoon. Congratulations on the strategic move here. Raj, I'm just curious to hear you talk a little bit about how you see the separation playing out? Just if you could talk about what are the things that need to be done to ensure a smooth transition.
And then also, what are your thoughts on the risk of customer attrition as you separate out the two businesses and just ensuring that customers aren't confused by the separation or maybe see it as a risk to their operations, you guys separating out the two businesses. Thanks.

Raj Subramaniam

Yes. Thank you, Ari. I think we are -- we decided to separate because of the potential to increase shareholder value for both FedEx and FedEx Freight. As far as we have put in place the separation management office with Claude Russ as the head to make sure that we are on get from here to day one.
To the points that you made, as Brie talked about, we have appointed a VP of LTO sales, and we are going to add 300 sales folks, but in the next year, to make sure that we pay more directly deal with the issue that you talked about.
We are also going to continue to improve our customer experience. It's very important for you to note also that the FedEx Freight company benefits a lot from the association with FedEx. And that association, whether it's commercial, whether it's operational or other's technological, we will have those arrangements in place as we proceed through the separation. So I think we'll be able to handle this transition quite well.

Operator

Jordan Alliger, Goldman Sachs.

Jordan Alliger

Yeah. I am just curious if you could give a little more color around the Network 2.0 rollout, the progression that's planned from here. And given the experience with Canada or any other areas? What do you think has gone particularly well? And what has been the more challenging aspect of it all? Thank you.

Raj Subramaniam

Yes, thank you very much, Jordan. I think, yes, we may continue to make significant progress on network to. We've taken a deliberate approach to roll out and prioritizing service policy. We have optimized 200 stations so far and including 130 in Canada. And we will complete the rest of the Canada integration early in 2025 with the last major market being Montreal as a feature of how we roll this out every overtime, we roll out something, we take lessons to learn and when we keep applying into the next one.
And that's working quite well. We are continuing to see 10% P&D cost reduction where we have fully rolled out 2.0. So at the end of FY25, we expect to have approximately 250 stations integrated. So hopefully, that answers your question, Jordan.

Operator

Daniel Imbro, Stephens Inc.

Daniel Imbro

Hey. Good evening, everybody, and thanks for your questions. John, maybe one on capital allocation and the balance sheet. So first, I guess, how do you envision maybe debt being divvied up? Or how should we think about target leverage for each business?
And then, John, you've worked hard to reduce the capital intensity of both businesses, I guess how do you envision capital allocation changing at all? Will this spin enable certain investments you previously weren't making? Or how did that change?

John Dietrich

Sure. Thanks, Daniel. Yes. No, we're not anticipating any changes in capital allocation. We're continuing to be focused on optimizing our existing business, ensuring significant adjusted free cash flow is returned to stockholders.
That's going to be true both before and after the separation. We continue to have the programs in place. We're going to -- we've already accomplished $1 billion of share repurchases in Q2 for a total of $2 billion for the full year with remaining $500 million for the remainder of the year.
So that's all going to remain in place. Now in terms of capital allocation in the post-separation environment, that's all going to be something we're going to be reviewing over the coming months and look forward to keeping you updated on the progress of that.

Operator

Jason Seidl, TD Cowen.

Jason Seidl

Thank you, operator. Everyone, evening. Thanks for taking my questions and congrats on the spin. It's always nice to see some value creation out there. I wanted to focus a little bit on the commercial agreements you spoke about.
You mentioned the ones that were with peak help and drayage. How long are these agreements for? And also, what about anything on the bundle side between the two companies? I'm assuming existing contracts that are offer be honored. And how should we look at the bundle going forward? I'm assuming they'll just go away.

Brie Carere

That's a great question. So I think we just need to take a step back and just clarify what the customer base of FedEx Freight looks like today. So first and foremost, obviously, FedEx right would not be the powerhouse that it is today without the incredible strategy to take these three networks together, put them together, put the FedEx brand on them, and then to build off just the incredible relationships that FedEx has with customers. That is one of our commercial strength is deep solutioning and partnerships with our customer, and that has really created a lot of momentum.
That being said, if you look at the majority of the FedEx Freight revenue base today, while the majority of small customers are bundled, the majority of the actual volume at FedEx Freight is negotiated on an independent contract today. We really made a pivot, I guess, about four or five years ago recognizing that when we are competing in a fragmented market, we had to negotiate the freight business separately.
So those contracts will be honored. As you know, the vast, vast majority of FedEx freight contracts are renegotiated every year. So of course, they will be honored as we go through this process.
And that's why we are very confident in the incremental focus dedicated sales team. It's important to note, we have about 75 sales reps today that are dedicated to large accounts at freight.
So this will be additive to them. As we go through the process, we will look at the small customer strategy, and I anticipate that, that will be slightly nuanced because that's where we really have leveraged the benefit of the earned discount program at FedEx. There is a common mess that FedEx Freight revenue is diluted because of that bundle, and that is not true.
Actually, the way the earned discount program works is that as they ship more FedEx Freight or more LTL you actually get incremental benefit on your parcel side. So there is some potential benefit from small customer improvement, too. But we're very comfortable in our commercial strategy, and we can execute it.

John Dietrich

I think what I would add to that from a intracompany standpoint, it's important to recognize that through separate operating companies previously and as Raj mentioned in his comments, freight has benefited from providing services to Euro Express. So a lot of agreements already exist that will just be enhanced as we go forward with the separation. So we're not going to have to reinvent the wheel on this.

Operator

Conor Cunningham, Melius Research.

Conor Cunningham

Hi, everyone. Thank you. Maybe going back to the first question just on EPS, the change in the guidance. So Freight was clearly pressured in the quarter. Is the entirety of the change in the guidance associated with the freight business? It just seems like the underlying core trends in Express are actually improving. I don't know if you could just talk a little bit about the dynamic between the two businesses and the changes overall.

John Dietrich

Sure. Thank you, Connor. So Look, there's a number of considerations. The pricing actions that we've implemented are supporting our FY25 earnings growth assumptions for sure. However, revenue expectations remain constrained due to the demand environment that largely resulting from the continued weakness in the US industrial economy that Raj talked about.
So US premium services, even though there's some -- we talked a little bit about peak, but US premium services are expected to remain muted for a while. Thereby putting pressure on op income and margin. We do expect continued growth from our deferred services, which are contributing, but with lower margin and lower flow-through to the bottom line.
So really, the top end of our range assumes a modest improvement in global industrial production and slight revenue slight growth in revenue. The low end of the range assumes revenues declined slightly year over year driven incremental -- incrementally softer industrial production and pricing and the midpoint just assumes flattish revenue year over year.
So we're going to be focused on controlling those things we can. We remain confident and drive and those savings will continue to ramp incrementally during the second half. But those are some of the considerations that are going into our outlook.

Raj Subramaniam

Yes. And let me just add one other thing, Connor. I think at an overarching level, I mean, it's been really surprising for me to see the last the last 25 months that were declining ISM to '23. So it's very difficult to say when that will turn around and the fact that we have produced the results and especially in was in this environment, I think it says a lot about what we can do and also shows what can happen when that market turns. But we are assuming that the industrial production and the manufacturing continues to be similar to what we saw in the first half for the second half.
And as was stated earlier, 60% of the revenue for the FCC coming from B2B, while 90% comes from LTL. So hopefully, that will help you with the calculations.

Operator

Brian Ossenbeck, JPMorgan.

Brian Ossenbeck

Thanks for taking the question. So Brie, I just wanted to come back to you on the general trends for price and competition. You mentioned it's still pretty competitive out there. You don't see a trade down necessarily, but it does sound like the deferred side of the business is growing faster.
So I just want to see if you can offer a little bit more comment. It sounds like the demand surcharge is sticking, but what about the other ones that you've put into place to help optimize the network and get that revenue management moving in the direction that you would want? How are those sticking? And how would that progress from 2Q into the back half of the year? Thanks.

Brie Carere

Hi, Brian. Great question. So the market certainly is competitive. I do feel that it's rational. From a pricing strategy, as we think about the yields in the back half, they are going to remain pressured. That is a function of two things: one, the economy; and two, to your point, there is a mix change.
I do want to emphasize that we do have some customers trading down. We're also, as we go to acquire new volume and customers because all of our customers are simply trading less. In a downturn, you need new customers to be able to add to the portfolio. And so there is growth in new customers in the deferred portfolio.
From a pricing strategy perspective, I think the team, despite the economy is executing really well. The pressure that we're seeing is on the base rate and then wait. We know every time we're in a downturn, ways are pressured really across all the portfolio, but especially in the freight. And so there's not a lot that the team can do from a weight perspective. What they can do is be really disciplined in getting the surcharge go through from a port perspective.
As you heard, not only are we being disciplined from a large package capture on surcharge, the dimensional capabilities that we're putting in to get capture is increasing it. And then from a rural perspective, we have the best value proposition here in the United States into the rural markets, and that matters for a lot of our customers.
The last 3% or 4% of their volume, they don't want to have to use a different provider. And so we're really being disciplined on getting those surcharges. They are contributing, but the base rate is really pressured because of the economy. I hope that helps.

Operator

Brandon Oglenski, Barclays.

Brandon Oglenski

Hey. Good morning and congratulations on the spend. I know a lot of your shareholders will definitely be happy here, too. But I guess, Raj, can you expand on what you're doing differently under Drive. You spoke about how it's driving the way you do business today versus what you did yesterday, especially in the context of revenue quality, which I think Brie has mentioned many times, and maybe even reflecting on losing your largest customer, but it looks like your margins have actually come up. So what else in the portfolio potentially can you change looking forward?

Raj Subramaniam

Okay. I'm trying to digest that question, Brandon. But let me just start with Drive firstly. I think drivers clearly evolved to be how we work in this company. We have established an overarching market-leading approach to overall governance that leads to disciplined execution.
And we are -- it's a data-driven approach and very rigorous and very timely decision-making and ultimately leads to much, much better execution. So this is going to stand us in good stead as a foundation for FedEx to execute as we go forward.
The second thing is we also adopted a data-first digital mindset, solving problems while creating differentiation in our service offerings. The underlying technological innovation and transformation that we have created is quite profound.
And that's -- those are the two things powering our execution. And that's also why, as we've changed our vision to making supply chain smarter for everyone, it starts by making our own supply chain smarter the of the $4 billion of drive savings, I think roughly $1.8 billion would be directly the result of the new technologies that we have put in place. So that's what drives all about.
And as we look at what comes next, whether as we implement Network 2.0 or whether we improve and expand on tricolor or expand our operations and expand our performance in Europe, all those are going to be guided through drive, and that's what gives us the confidence of execution. I hope that answers your question that you asked.

Operator

Bruce Chan, Stifel.

J. Bruce Chan

Hey. Good evening, everyone. And I echo the sentiments on the spin, great to see. Maybe somewhat of a brief follow-up here to Brian's question. There's been some suggestion of a USPS privatization. Maybe we can get your thoughts on what that would mean for the competitive environment. Is that new bona fide competitor? Or is that maybe introducing a more material profit mandate and thus making the postal service more rational. So any thoughts and color there would be great.

Raj Subramaniam

Well, it is very early for us to comment on something like that. We will keep that -- we are monitoring the developments there very closely, obviously. But one of the principles that I think it's important to state here is that for our industry, it's important that the package delivery business is not subsidized by the US taxpayer. I think that's a very important consideration set. And hopefully, that will be what will get adopted here.

Operator

Jon Chappell, Evercore ISI.

Jonathan Chappell

Thank you. Good afternoon. Brie, I was hoping to ask about tariffs. It's a narrative that seems to be dominating some of the sentiment around the group right now. You're at a much different cost structure than you were in the first Trump administration.
So just as it relates to tariffs have you heard from your customers about any pull forward? And I guess, secondly, how would you manage your network if there were to be a surge in demand that may be more of like a short term as opposed to a long-term secular shift?

Brie Carere

Yes, it's a great question. From a December perspective, there might be a little bit of a pull forward. As we talked about, we are seeing some movement both in the freight network and in the parcel network from the ports. So there might be a little bit. It's hard to tell right now because we're in the middle of peak.
How much of that is inventory as well as how much is just consumer demand. So obviously, it will be much clearer in January. From a reaction perspective, I am really pleased with how quickly the airline team is able to respond right now.
To Raj's point, we are doing things differently with Drive. So as far as being able to adapt, I'm very confident as Raj has shared many times, we're everywhere. We have customer relationships everywhere. So as customers prepare to pivot, we're there to pivot with them. So it's very hard at this point to predict what might happen under our future administration.
So we're not going to try to, but we are ready to respond with agility.

Raj Subramaniam

And Jon, let me just say that, as you can imagine, we are a referendum on global supply chains every single day. And especially on the high value of the economy, and we see this information from the bottom up.
And we -- and the fact that we have a scale network already in place that connects 99% of global GDP is a significant advantage because we can move our capacity much, much quicker then manufacturing can move. And so it is -- we are very agile, much different than what we've been the case before. And that's -- one other thing I would say is that you can imagine that as part of our value proposition is an end-to-end delivery.
International, that includes customs clearance. So we have the data, the expertise, the insights about what it takes to move package from one country to any other country and all the commodities that they're in. So this becomes a competitive differentiation and advantage for us as we make our customer supply chain smarter.

Operator

Scott Group, Wolfe Research.

Scott Group

Hey. Thanks. Good afternoon. John, you said a couple of times that the post office headwind is bigger than the Cyber Week tailwind, but there's a lot more moving parts. And so maybe can you just clarify what your trying to communicate around Q3 expectations? And then on the LTL spend, I just want to understand a couple of things. Why is it 18 months seems a little long.
And then as we do our math, is there any way to just think about if there's much, if any, of the corporate unallocated costs that we should apply to LTL? Thank you.

John Dietrich

So thanks, Scott. So let me start with the 18 months. From a timing standpoint, the 18-months period for a transaction of this magnitude is really consistent with what is reasonable to expect. And we do look forward to keeping you posted on our timing and milestones along the way. So we look forward to keeping you posted there.
With regard to the Postal Service, as I mentioned in my remarks, we are on track to take out cost as planned with the US Postal Service contract expiration. We talked about the flight hours taking out.
Roughly 60% of our US domestic daytime flight hours have been taken out, and that makes up about 24% of our total daytime hours. We're also going after all the other related costs. So as I mentioned in my remarks, Q3 will be impacted because it will be a full three months of impact from the Postal Service contract, and that will start to wind down in Q4, and we'll start to see it as a tailwind into FY26. So that just gives you some background and perspective.
We're pleased with the work that's been done. There's more to be doing and taking that cost out. So hopefully, that gave you some good color on the postal service.

Operator

Tom Wadewitz, UBS.

Tom Wadewitz

Yes. Good afternoon. Thanks for getting me on for a question. I appreciate it. Let's see. On the LTL, and thanks for all the detail on the spin, it's complex, but it's helpful to hear your thoughts. Raj, would you anticipate that you get somewhat more volume-focused with LTL in the future?
You talked about the 1,100 basis points of improvement in the margin over a period of time. And I think that was driven by some of the change in focus on pricing and a lot of discipline. I'm wondering, would you anticipate that hiring a bunch of salespeople focus on those things, would you potentially be more volume focused and maybe compete harder for freight in the future? Or is that the wrong way to look at it? Thank you.

Brie Carere

Tom, it's Brie. So I think, first, in the main, we're really pleased with the discipline that we've got across the team. From a revenue quality perspective, we've made great strides. As we look forward, we do see this as an opportunity to play offense. We are going to invest commercially in new salespeople.
We know we've got an opportunity from a different industrial mix. And as I mentioned earlier, from a wait, while our weight is down right now in our base because of the macro, when we look competitively, we think there is some opportunity using technology to fill up the capacity.
We know the FedEx Freight network right now can run very at 100 to 105. So we've got some opportunity to be a little bit more strategic also to look at the 3PL market. So the answer is yes, we're going to play more offense and we think there's some great things to come.

Operator

David Vernon, Bernstein.

David Vernon

Hey. Thanks for fitting me in here. So coming back to Network 2.0. I think, Raj, you mentioned like 225 stations would be consolidated or something like that by the end of -- I think it was fiscal 2025. Can you give us a sense for what percentage of volume you might have touched with the Network 2.0 integration to date? And then as you think about the timing of when the more difficult to tackle major metros may start to be coming in play.
Is this fiscal '26, fiscal '27 timeline? Just trying to get a better sense for when the rubber really starts to meet the road, so to speak, on the physical integration of the core operations in the heart of the domestic network. Thanks.

Raj Subramaniam

Yeah. Thank you, David. The FY25 numbers, 250 stations integrated. I think the big lift is going to be in FY26. So we have FY26 and FY27 are the two big years, but FY 2016 will be the big lift for us for Network 2.0.

Operator

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

Raj Subramaniam

Thank you, operator. In closing, I'd like to thank our team members for delivering this outstanding peak season. We have five more days to go, and I really look forward to a very strong finish. Let me wish all of you listening on this call a very happy holiday season. Thank you so much.

Operator

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