Good day everyone and welcome to the FedEx Corporation First Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn things over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Good afternoon, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter Form 10-Q earnings release and stat book are on our website at fedex.com. This call is being streamed from our website where the replay will be available for about one year. Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call such as projections regarding future performance may be considered forward-looking statements within the meaning of the Act. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman; Raj Subramaniam, President and Chief Operating Officer; Alan Graf, Executive Vice President and CFO; Mark Allen, Executive Vice President, General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Brie Carere, Executive Vice President, Chief Marketing and Communications Officer; Don Colleran, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; and John Smith, President and CEO of FedEx Freight. After our Q&A session today, Fred and Alan will have some additional comments. And now Fred Smith will share his views on the quarter.

Thank you, Mickey. First and foremost, my sincere thanks goes to our team members for their outstanding and ongoing efforts to respond to COVID-19 challenges. At FedEx, keeping the world connected in good times and during periods of great needs, is who we are and what we do every day. With safety as our first priority, we have worked tirelessly to keep the world’s industrial, healthcare, and at home supply chains flowing during the pandemic. Detailed planning is underway at FedEx to distribute vaccines at scale worldwide once approved. Our earnings growth underscores the importance of our business initiatives and investments over the last several years. In many ways, the world has accelerated to meet our strategies and we remain very confident in the future of FedEx. This will be Alan Graf’s last earnings call and we are very, very grateful for his more than 40 years of dedicated service. Alan has been a part of every significant decision and helped navigate tremendous growth, strategic investments, international acquisitions, and global and market change. FedEx would not be the globally admired corporation it is today without Alan’s leadership. Mike Lenz will assume the role of CFO beginning 22 September and Alan will remain the Senior Advisor until the end of December. At the end of this call, I will ask Alan to say a few words. I would also like to thank John Edwardson, who is retiring from the FedEx Board of Directors for his wise counsel and more than 17 years of service. Our Board of Directors has approved resolutions of appreciation for both Alan and John that provide in greater detail their invaluable contribution to FedEx’s success. I will share the highlight of these at the 21 September Shareholders Meeting and the resolutions themselves will be posted on our Investor Relations website. Let me now ask Brie, Raj and Alan to provide their comments, after which we will take your questions. Brie?

Thank you, Fred. Good afternoon, everyone. The economic outlook remains uncertain due to the continued impact of COVID-19 around the world. Until a vaccine is available globally, and the virus is contained, forecasting economic recovery remains challenging. In the U.S., spending that would normally have gone into services has shifted towards goods with goods spending boosted further by pent-up demand. Retail sales are growing again year-over-year and ecommerce is building at holiday levels and of course, more to come on that in a moment. The service sector is severely impacted by the pandemic and higher employment rates continues to weigh on growth. Outside of the U.S., recovery has taken hold as well as coronavirus-related restrictions have been loosened. Manufacturing output is improving off the April low and trade activity is on the [moment] [ph]. Trade – global trade volumes which declined 10% in the first half of calendar year 2020 have resumed sequential growth. However, given the depth of the downturn, we expect global GDP and trade growth on a year-over-year basis to remain negative for the remainder of this calendar year. There are two trends that have had substantial impact on our industry and showcase FedEx’s incredible value proposition. The first key trend is the dramatic reduction of air cargo capacity as a result of the significant loss of commercial airline capacity. Current estimates indicate that freighter capacity now accounts for 66% of total air capacity on the Transatlantic lane, 83% on the Transpacific and 80% on the Europe to Asia lane. This compares to pre-COVID freighter capacity of 33% for Transatlantic, 59% for Transpacific and 50% for Europe to Asia. FedEx Express is incredibly well positioned to benefit from a constrained air capacity market. We’ve experienced elevated demand, enabling both the expansion of existing customer relationships and the…

Thank you, Brie and good afternoon. Let me start by first echoing Fred’s sentiments about the valiant efforts of our team members during this historic time. We are exceptionally proud and grateful of our FedEx team members who worked diligently each day to deliver the proper promise, especially in the midst of the ongoing global pandemic. Thank you team FedEx for your commitment and dedication during this dynamic time. FedEx has nearly 50 years of experience flexing our networks to stay ahead of what’s next. Over the past couple of years, we have launched a number of strategic initiatives to directly address ecommerce opportunities. To recap, this includes, expanding U.S. Ground residential delivery to every day of the week; integrating smart post package volume into the Ground network; investing in technologies that enable real-time decisions and optimize virtually all aspects of our operation; building our network’s capabilities to more efficiently handle and increase large items such as furniture, exercise equipment and TVs; offering the FedEx’s first FedEx branded Through The Door Service which moves larger bulker items into customers’ homes and businesses and accelerating the expansion of our retail convenience networks with Dollar General, Walgreens, and our own FedEx office locations. While our strategy did not change, the timing certainly did. The growth that we expected to see over a period of three to five years happened in a period of three to five months. Our strong financial results in the quarter are largely driven by the excellent execution of our aforementioned future ready strategy, coupled with the acceleration of ecommerce trends. We are also happy to note that our B2B volumes across the segments have continued to steadily improve over the summer with Ground B2B average daily volume in August exceeding prior year levels. As we look to Q2,…

Well, thank you very much, Raj, and good afternoon, everyone. I am very proud of our first quarter performance. Adjusted operating margin improved 240 basis points year-over-year to 8.5% as FedEx Express adjusted operating income more than doubled and adjusted margin improved 390 basis points. FedEx Ground operating income increased 30% despite a significant mix shift to residential delivery. And FedEx Freight operating income increased 41% despite a 9% decline in average daily shipments. All totaled, our first quarter adjusted operating income increased 56% year-over-year primarily due to international priority volume growth of 31%, a surge in demand for U.S. residential delivery, yield improvement at FedEx Ground and FedEx Freight, a $130 million benefit from an additional operating day, a $65 million benefit from a reduction in aviation excise taxes provided by the Cares Act and a better alignment of our expenses, especially at FedEx Freight. These factors were partially offset by higher cost driven by the package volume surge and expanded service offerings at FedEx Ground, increased variable compensation expense, and an approximate $100 million in COVID-19 related cost to ensure the safety of team members and customers. Variable compensation expense increased $195 million year-over-year with approximately half of the increase due to a reversal of long-term incentive plan accruals in the prior year period. Our effective tax rate was 22.5% for the first quarter compared to 25.2% in the prior year period. This year’s tax rate was favorably impacted by changes in our corporate, legal entity structure and increased earnings in certain non-U.S. jurisdictions. We ended the quarter with $7 billion in cash and cash equivalents and with $3.5 billion available under our credit facilities. Last month, we issued $970 million of pass-through certificates with a fixed interest rate of less than 2%. The certificates are secured by…

[Operator Instructions] We’ll hear first today from Tom Wadewitz with UBS.

Yes. Good afternoon. And Alan, congratulations again. Great career, and well, what a way to sign off at such a strong quarter. The – let’s see, I wanted to ask how you think about the trends in the business in terms of were there some things that you think fell off in the quarter or fall off or do you think the performance in Express Ground from a revenue and margin perspective are likely to continue and we got to forecast earnings kind of accordingly?

Tom, thanks for your kind comments and I appreciate them. I will say this, knowing that I was going to get a couple of forecast questions, I did worked really hard this time to give you two howevers and reemphasize in my opening remarks. And I would think if you would go back to those, that’s about as good as you are going to get from me today. Mike Lenz is probably going to be in the same boat in December as I am today with all these uncertainties. It’s just really too difficult to say, but I did say, if current trends continue that we’d improve our operating incomes at all three of the major opcos in 2021.

Okay. I mean, was there anything that was one-time this kind of any quarter or not?

Well, fortunately for me, I had planned years in advance to have one extra operating day this quarter when I knew I was leaving. But other than that nothing.

We’ll hear next from Jack Atkins with Stephens.

Great. Good afternoon. Congratulations on a great quarter and Alan let me echo Tom’s congratulations on your retirement. I guess, it’s one for Raj, but I want to appreciate Brie’s thoughts as well, the pulling forward of your 2026 domestic growth expectations forward by three years to 2023 indicates to me that what you are seeing is more than sustainable. So my question is, when you think about your Express, your Ground, your Freight networks, where do they sit today in terms of capacity utilization? How do you think about balancing the need to remain capital disciplined and upgrading your revenue on one hand versus the desire to grow and participate in such a strong market tailwind on the other hand?

Let me start first and then Brie can add to it. Clearly, we think the same thing. I think the market – the ecommerce market is large and it’s growing and the growth has accelerated as pull forward by three years. And so, that’s clear now. The second thing that’s clear is the value that FedEx provides to the growth of ecommerce. We work strategically with the several of retailers around the world and then particularly in the U.S. to provide the solutions. So we are – when you hear of stories about ecommerce growth across different retailers, you can bet that FedEx is behind those stories. And thirdly, we are going to be very disciplined in how we manage capital and our revenue quality going forward. But we are most importantly working to provide the best solution possible for our customers working hand-in-hand to be creative in solutions for the ecommerce while working strategically with them. Brie?

Really not much to add. The only thing I want to say is Henry and I are lock step. We are trying to thread that needle of improving quality but also again a reminder, we keep talking about Sunday as a delivery advantage from a customer perspective. It’s also an incredible advantage from a capacity perspective and we are strategically leveraging that partnering with customers who can pull volume forward into the weekend. And I really don’t think that that has been factored in previously and customers understand this and it’s a huge strategic advantage going into this peak and several peaks in advance.

Brie, there is another one, why don’t you take it. We just hand it to you there.

Sure. I’ve also got a question about Walmart new subscription service, Walmart Plus. So, I can’t talk a lot about the relationship. Obviously, it’s one we value very much. It’s strategic. It’s long-term and we are committed to growing with them. We have a very healthy partnership there. We are very excited about it. There is also some questions here about same day. I want to highlight as we think about the market growing, the market is essentially going to double in size by 2026. So, when I give those numbers, I think that’s the other that’s been lost as the market is going to double by 2026. Same day from an ecommerce perspective remains a very tiny percentage of the market. So we continue to be focused on the remainder of the market but we are very excited about our partnership with Walmart.

I should note when you talk about the seven day network, it’s not only capacity and the advantages that Raj and Brie mentioned, it also is very cost-effective, because it spreads the fixed cost across many more units.

Chris Wetherbee with Citi.

Yes. Hey. Thanks. Good afternoon. I guess, I wanted to ask about sort of the pricing strategy going forward. So, surcharges are coming in and it appears you are having some deep impact long yields, particularly on the Ground side, as you think about sort of the meaning the next six months or so, how you might pack sort of the pricing opportunity? How much do you think comes through the surcharges? Do we have the risk of being a little bit more temporary and how much can you [indiscernible] and longer term contracts [indiscernible] through the next [indiscernible]?

So, I think everybody is aware, from a domestic perspective, we put in our surcharges on June 8th. That was in the $0.30 and the $0.40 for SmartPost. The $0.30 being for the residential surcharges. We have announced that we had to increase those surcharges as we head into peak. The oversize portfolio will increase in early October and then we will increase our holiday surcharges from November through to January 17th. So surcharges are certainly an important part of our revenue quality. But I would say that they are one piece of that. We have actively had conversations with our top-25 and now moving to our top-100 customers. And we’ve got a multi-tiered strategy here. As I talked about earlier, we are rewarding customers that can pull volume forward. We are rewarding customers that can integrate their supply chain that are open to longer term contracts. And of course, from a capacity perspective, we are no longer just taking inbound forecast. We are working with customers and we are having kind of a balanced conversation between base yields, surcharges and capacity management. So it’s a multi-tiered strategy. Most importantly, we are planning for the long-term. We want strategic relationships. We want to partner with customers that are going to win in the market and we think we are doing a really good job of that. My hats off to the sales team because they have just done an excellent job with this.

We’ll move next to Allison Landry with Credit Suisse.

Thanks. Good afternoon. So, your main competitors signal that SG&A could be a big focus for cost reduction and maybe as we take broadly at FedEx is a real cost structure, do you also see opportunities to lower SG&A? In other words, what are some of the incremental cost opportunities that you have going forward beyond the TNT integration, SmartPost integration, et cetera that we might be able to think about in terms of margin improvement going forward. Thank you.

Allison, I think we’ve done a really good job with SG&A. Obviously, one of the headwinds is a good one is that we are able to pay additional incentive compensation to our teammates for the great job those are doing versus what we’ve been able to do in the past. I think our SG&A is structured such that, we can grow very rapidly with very little addition to our SG&A going forward. We are becoming much more productive. I even have [bought some] [ph] of the accounting department. I am very excited about where we stand in that regard. We’ll continue to work very hard on productivity and density and stops per hour. Our new airplanes providing us greater reliability and lower cost, almost any way that you can measure it and those will continue. So, I think that that we’re rigged for not only great pricing and revenue performance but also cost performance going forward.

And from Goldman Sachs, we’ll move to Jordan Alliger.

Yes. Hi, Alan. Congratulations on your retirement. Alan, on your retirement. My question is on margin seasonality. Realizing this is not a particularly typical year, would you anticipate though sort of typical ebb and flow of Ground and Express margins as we move through the quarters from here or what would be something that alters the normal patterns?

I would say that the history is probably not as good a predictor of this year as it otherwise has been. You are right about normally, our summer is our weaker and our fourth quarter is our stronger. But the acceleration of the traffic that we may be able to handle this quarter was so much bigger than a year ago as to be almost unbelievable. We are in COVID hit. Obviously we took some hits. So it’s going to be spotty and I’ll stand on my two howevers in my reemphasizes as the rest of my forecast.

We’ll move on to Duane Pfennigwerth with Evercore ISI.

Hey. Thanks so much for the time. A question for you on Europe. Some of the investors we spoke with, we are looking for better quantification of what a turn in Europe could be worth. Can you speak to how much TNT is holding back Express margins currently? And maybe can you frame the opportunity for profit improvement in Europe?

Let me start and then I’ll give it to Don Colleran for his comments. Obviously, we are not going to be able to quantify the level that you like. However, we are – clearly, that’s our biggest opportunity ahead of us and the international market is to make sure that we performed better in Europe. I think the integration activities of TNT have gone apace and we are in a position now to take advantage of the portfolio that we have to do exactly that. Just to remind you, before TNT acquisition, we were heavily intercontinental light due to Express and Intra European Express we were good. But we were never present in Intra European ground or the domestic markets now we do and so this portfolio is going to stand us in good stead. And we believe there is a good opportunity ahead of us and the team is very focused on executing against that plan. Don?

Thanks, Raj. A couple comments. One about Express and I’ll quickly get to what our plans are in Europe. First I want to thank and recognize the amazing Express unit, men and women of that team had put together a fantastic first quarter. Greatly supported wonderfully by our commercial partners and sales, marketing, IT that really made the quarter the historic look that it is. However, at Express is a culture knowingly one said, we have moved on to quarter two. We’ve got our head down and we are focused on peak season planning, as well as hoping that a vaccine is around the corner and where you uniquely position as Raj said earlier to handle that with our global network. When you think about Europe though, you need to think about what Raj said earlier. We are essentially where we told the street we would be in terms of our transformation, integration by April 2022 where it will be hopefully be fully integrated on the air side. But we have really solid plans for our European team. We have an excellent team on the ground that’s supported by amazing team globally. And as we are in our rest of our units and regions, we are focused on execution and just if you watch the team execute on these plans, they are solid and they have a track record of making things happen how we expect that to be the chase in Europe as well.

We’ll move on to Scott Group with Wolfe Research.

Hey. Thanks. Afternoon guys. And best of luck in retirement, Alan. So, I wanted to ask if the – we get into peak season, does the ground network have the capacity to maintain 30% volume growth and through peak. And then, Express yields were still down year-over-year with all the pike in strategies going on. Do we see opportunity for – when Express yields increases?

Scott, this is Henry Maier. We’ve been operating at peak since March. So the stepping off point for peak this year is frankly not as much as it’s been in years past. It’s important to point out here some of the things that have already been said, we are operating a seven day network, every day of the week year round. We will have SmartPost fully integrated into the Ground network by peak, which allows us to repurpose 28 former SmartPost facilities for large and small package operations and ground sortation and I might add that’s pretty cheap capacity to get. We are running much higher yielding packages through than we have in the past. And as Fred pointed out, better asset utilization, lower fixed cost across the whole network. In addition, you saw the announcement on 70,000 new hires for peak. That’s on top of a historic number of employees at FedEx Ground right now. Our service providers have stepped up and hired tens of thousands of new drivers since all of this began back in March. We are adding six regional sort facilities, four new automated stations. We have about 50 projects underway which include expansion of additional automated sortation capabilities and material handling and then all the other things that we typically do at peak in terms of being able to squeeze additional capacity out of the network for a fairly short period of time. So, we are highly confident that we are going to have a great peak this year. It’s going to be busy, but nevertheless, I would say that the Ground team is ready.

Let me take the international yield question. So I think most important to understand is that if you look at the yield, half of the impact for both Domestic, Express, as well as International Express with fuel, when you strip out the fuel impact, there was pressure from a weight per package perspective and the growth of ecommerce led by growth when we’re very excited about this growth. Europe outbound from an ecommerce perspective. That being said, we are doing a really good job partnering with Don and his team on density and the yields per pound is up significantly. So you can’t just look at international Express yields quite frankly just at the shipment level. You’ve got to look at yield per pound and overall from a network perspective total Express yield per pound is up 11% year-over-year. So we feel really good about the overall performance from a yield perspective with those things taking into consideration.

From Wells Fargo, we’ll move next to Allison Poliniak.

Hi, guys. Good evening. I am sort of keeping on Ground, nice incremental operating leverage within that business. Raj, you had talked a little bit about, some obviously, some more incremental opportunity out there. But as you look at that business today, would you think longer term, is there anything structural that would hinder you guys getting back to sort of a mid-teen operating margin level in that business?

Firstly, the most important thing about the network that we have provided with the ground is the better value proposition in the marketplace that we provide our customers. And I think that’s translating into more business and more profitable business. And the things that we have put in place not yesterday, but over a period of the last year or two is now, as Fred pointed out is paying off in many ways. So, the target is of course to continue to both improve revenue and margins to go forward and we believe we have the structure to do just that. I don’t know, Henry, do you want to add anymore to that.

Yes, Allison, let me just say couple things to add on to Raj’s comments. The first quarter of fiscal 2021 was FedEx Ground’s highest quarterly revenue and operating income quarter in history. In spite of that, those results flow from a number of steps we took several years ago to transform FedEx Ground and position FedEx to prosper in a market increasingly dominated by ecommerce. I’ve spoken of the integration of the Ground and SmartPost networks. I’ve spoke of the expansion of seven day. You can’t do any of this without the introduction and use of world-class technologies. We are about a week away from having quickly rolled out our advanced route optimization software to all the drivers. I should point out to you that this was developed using safe agile methods and it was rolled out across our networks in the middle of a hundred year pandemic in 13 months. That’s pretty damn good if you ask me. Not only does this enable our service providers to better plan routes, fleet type, number of trucks, types of trucks, volume on trucks on a dynamic daily basis, but it’s already improved significantly final mile efficiency specifically increasing stats per hour in the network in spite of everything we have already talked about in Q1. The integration of SmartPost line in the networks improved density both on a square mile basis and on a delivery basis driving the average cost of our stops found. So, I think we are – I think where we sit today, our best days are ahead of us. And we still have a lot of work to do here.

We’ll hear next from Brian Ossenbeck with J.P. Morgan.

Hey, good evening. Thanks for taking the questions. I just want to come back to your execution into the holiday peak season. Just last year it’s obviously it got tough with Cyber Monday coming in at – planned same period here with a lot more volume and but also lot more initiatives and leverage to down to the level some that which you’ve talked about here and announced recently. So, stepping back how confident are you that it’s enough to have a successful peak and do you feel like you can make adjustments and recover if needed?

Well, let me start and then let Brie and Henry can add. I think this is going to be a peak like none other. But we believe that we have now the capabilities and the flexibility to do a lot. I think the number one thing that the customers now looking for is capacity and we are working strategically with them to make sure that we can deliver that, again having operations seven days a week helps a lot here too and the technology that we have. So, we clean the flexibility that we have in our infrastructure that we put together with the technology that we have and the customer solutions that put together, we think and that we are going to manage so to speak quite well. And we turn to Brie for her comments.

I’ll simply let Henry talk about the physical capacity allotments, but from a customer perspective, we are really working hard to set expectations with our ecommerce merchants. I think they are very well aware that this is going to be a peak like no other. The most important thing for our customers’ customers is to set appropriate expectations and give them transparency to the appropriate transportation commitments and we are working very hard to do that to set expectations to get visibility and to expose that to all our digital channels and our customers’ digital channels. So, we are working very hard. You also saw that we adjusted our peak season surcharge specific to Cyber week to make sure that customers really posting their volume and that we help out Henry and the team wherever we possibly can. Henry, anything else?

Yes, I think the only thing I would add here is, even at the operations level, we have conversations almost daily with all of our top customers. Once again, this is not a new advantage peak, but this has been going since all of this began back in March. When you are operating a seven day network, let me back up and say, we are in a new normal here and there is a new normal for FedEx. But there is also a new normal for all of our customers. And when you are operating a seven day network, we have untapped capacity existing within that network if customers want to take advantage of that untapped capacity. For example, we have ample delivery capacity on Saturday, Sunday and Monday. We have ample pickup capacity on Friday, Saturday and Sunday. If everybody wants to ship on Monday, then we are going to have to have conversations with people about how we modify that demand to fit the available capacity we have on one day a week. If customer is flexible, I think we can accommodate most of what people wish to ship this year at peak.

Helane Becker with Cowen has our next question.

Thanks very much, operator. Alan, very sad to do these calls without you. I think, probably the only the whole time you’ve been the CFO this year and to John, thank you for all the work you do on behalf of this – that work is very important and very appreciated. And so, on to my question, can you just talk about the vaccine and your distribution capabilities in a sense that the ability to either store or move goods, the vaccine that has to be chilled for many as 80 Celsius and how – if you thought about how that gets handled in places like India, and Africa and Brazil, where in some cases we have very strong networks. How we should think about your ability to participate in that? Thank you very much.

So, as we talked about earlier, Helane, yes, we recognize moving vaccines across the global network is very critical work and we believe that we have the network, the technology, the solutions to do just that. We have engaged with several of our customers who are in this vaccine production mode. And we are planning appropriately for it and again, the timing is TBD at this point. But the capabilities that we have in around the world including the physical network, the storage solutions, as well as the SenseAware ID that we just launched and enhanced visibility platforms and the ability to intervene as needed is unique and I think we are well situated to handle this vaccines. Let me turn it over to Don for, because a lot of those are going to travel on the Express network.

Thank you, Raj and thanks for the question. Yes, I would like to add a little bit of color to this, because we look at this really as a supply chain design opportunity first of all for many months as you can imagine we were talking with the major manufacturers and customers in the healthcare space, along with HHS CDC and the FDA. So, this will be clearly a global team effort. What’s unique about this opportunity when you think it through is, there is very good a chance that, lot of ingredients are going to be made in one country. The manufacturing of these vaccines are in other country and other region and the consumption or the need for this is global. And this is why we are uniquely positioned. When you look at the 220 countries that we serve, well over 600 aircrafts that we have in our network and the ability to integrate that with our Air and Ground, we are uniquely positioned to support this critical initiative. And we are ready for it. We are planning for the multiple of peaks, but with this – that we are also looking at the ability to move on a global basis, these vaccines when they become ready. We are obviously hopeful like everybody else is that as sooner the rather than later, but when they do come and then came off the manufacturing line, we’ll be able to support those manufacturers on a global basis.

We’ll go next to David Vernon with Bernstein.

Hey guys. Thanks for taking the question. Henry, I wanted to come back to the topic you brought up around kind of working with customers’ profitability anecdotally, we’ve heard from a couple of different shipping people is that some of the on-time transit performance for the ground network is maybe lagging a little bit. I just wanted to give you a chance to comment on how you feel service levels is trending and then also as you think about the next two to three years given the pull forward in volume growth even pushing through the network is that change you are thinking about the size of the CapEx envelope for the Ground? Thanks.

Well, David, I’ve been in this business for forty years. I’ve never seen a more difficult operating environment from the one we are in. We are dealing with a 100 year pandemic, absenteeism as a result in certain facilities. Wildfires, hurricanes, social unrest unlike anything I’ve seen since the 60s. And I live through the 60s, so I remember it. All of that places some pretty difficult challenges on an operation when you are trying to run a national network. This is highly engineered and it’s precise as the ones we operate. FedEx Ground people have worked tirelessly through all of this. And I have eternal confidence that we’ll continue to provide world-class transit service going forward for our customers. On the issue of CapEx, I would say to you that we have been very diligent in the past about this. I made a comment about the SmartPost. We got 28 SmartPost facilities we are repurposing for Ground. That’s pretty cheap capital when you consider the fact that we can devote those buildings for Ground growth and they are essentially already included in the network footprint. Notwithstanding any of that, we are going to have to invest in the ground network going forward for growth as – and Brie gave you the specifics on ecommerce between now and 2026. We can squeeze more capacity out of this existing network, but we are not going to be able to maintain these growth rates once we invest in and I can assure you that that work is something that is ongoing in almost daily at FedEx Ground. Thanks.

Ben Hartford with Baird has our next question.

Thank you. Good evening, and Alan, congrats on your career and retirement. Just a kind of follow-up on CapEx and just cash management as we transition over to Mike’s leadership. Can you provide a little bit of perspective about how you are thinking about liquidity going forward. We’ve got a little bit of a different operating environment from an Express standpoint, you’ve got free cash this quarter. You’ve got plenty of liquidity on hand. How do you think about CapEx needs over the next few years and uses of incremental free cash flow and cash on hand, debt pay down, et cetera?

Appreciate the question. We are first and foremost going to repair our balance sheet. We’ve borrowed a significant amount of money in anticipation of liquidity needs that fortunately we did not have to have. But I can tell you back in March, when we were sitting around in table here, we had no idea of what to expect. And so, we got prepared the best as we could. I think you could see from my comments, we have over $10 billion of liquidity today. Obviously, we expect to have improved free cash flow. And so, while we are repairing the balance sheet, but we haven’t forgot about return to shareholders. Recall that over a number of years, we bought a significant amount of shares at a price of about $153, which looks pretty good today than it looked so good in March. And obviously, we have a frozen dividend right now because of our agreement with our banks. So, we will be looking at all of those, the first and foremost is our balance sheet repair.

Amit Mehrotra with Deutsche Bank has our next question.

Thanks for squeezing me and appreciate it. Raj, I was hoping on the Ground business, one thing that we’ve noticed at least as it refers to transportation costs that have continued to go up on a per shipment basis given what you guys are doing on SmartPost redirect, should there be an expectation or can there be a potential for transportation cost per shipments to be – to moderate significantly. So you please – piece of the cost structure. I think it’s important to address it. And then, just higher level, if we are sitting here in August or September of 2021, obviously 30% growth in Ground is not sustainable in perpetuity. I understand the secular benefits, but it’s worth to be heard this time next year the economy hopefully is pivoted because we have a vaccine towards maybe a more balanced goods and services and growth is negative in volume, how is the profitability structure of the business in that environment, if you can address that as well. Thank you.

Well, I’ll address the purchase trans question. Purchased transportation is driven by volume. I mean, all of our transportation is purchased with FedEx Ground. We don’t have company-owned equipment. We don’t have employee drivers. So, as the volume goes up, purchased transportation costs are going to go up. I think that something that maybe somewhat obscuring some of the numbers in there is the transit numbers of SmartPost Ground, because packages that formerly were treated as postage, because we paid the post office to deliver are now part of Ground settlement. That work will be done by the end of October with new exceptions. The Ground network is highly variable and highly flexible. We can scale up. We can scale down based on the volume. We contract with 5300 small businesses with employee something north of 130,000 employees. They see the changes in the volume at the micro level much faster than any of us could see it operating out of a corporate headquarter structure and they react almost instantaneously to any changes in volume, both up and down. So, this is not something that we haven’t been through before. I mean, we’ve been through up cycles and down cycles. Sometimes it takes us a little bit longer to ramp up if we don’t see it come in like this particular COVID-19 event. But I’ll assure you that we can take the cost out of this network really quick if we have to.

And from Bank of America, we’ll go to Ken Hoexter.

Hey, great. Good afternoon. Phenomenal quarter, Alan, and congrats on beginning your next phase and thanks for the comments over the past two decades. Maybe just my question is on maybe for Raj, on the thoughts on margin benefits from Express to Ground, I know, Henry you just mentioned kind of the parcel side of it, but you’ve also talked about moving Express packages over to Ground. Can you talk how that transition is going on volume or margin side? And then, just a clarification, Alan, have you delineated the benefits from the surcharges in terms of dollar size scale?

Well, I’ll answer the second, no, we haven’t, because it’s all part of one giant orchestra and one conductor and all the pieces flow together.

And on the first one, let me just make sure, as the B2C the residential volume continues to grow, they are definite and allows us the opportunity to optimize between networks. So, the residential and rural packages we are able to move from one network to the other as – and optimize it as a service. So, we will see where it goes. And as I told you we have launched it in a few markets. And we will monitor as we go forward here.

And at this time, I’d like to turn things back to Mickey Foster for closing remarks.

Okay. We have some final comments by Fred Smith.

Sure. As I said at the beginning, I was going to give the microphone over to Alan to make a couple of remarks. Let me reiterate what I said at the start in several of our colleagues have said here at the table on behalf of the Board and the strategic management committee, we thank Alan for 40 plus years of outstanding leadership in this company. He has been a great comrade in bringing man, not only in business but his accomplishments and contributions and so many philanthropic endeavors, Chairman in the University of Memphis, very heavily involved in establishing the FedEx family house he and Susan where I could spend half of the evening here talking about Alan in that regard. But as I said, this is an earnings call, so I’ll make more closing remarks at the Shareholders’ Meeting next Monday and let me turn the microphone over to Alan, who will say what he wants to say and then making – for meeting. Alan?

Well, thanks, Fred. In the fall of 1991, Fred took a chance on a 38 year old treasurer despite a significant amount of pressure to bring in a proven, seasoned CFO. When he told me he wanted me for the job, he said he had a tremendous amount of confidence in me and challenged me always think long-term and strategically. Among other things, Fred was very clear that I should always communicate what I thought no matter how against the grain it might be. That was great advice and has been the basis for our partnership ever since. As I finished my last of around 120 earnings calls, I want to give you a few thoughts in mind about where we are and how optimistic I am about the future of FedEx. Believe it or not, I have always looked forward to these calls no matter if the news was good or bad. I have thoroughly enjoyed preparing for the very excellent well thought out strategic questions I expect to be asked. While I often do not get these insightful and penetrating questions, I did enjoy the occasional bantering. I always endeavored to answer questions from a strategic viewpoint hoping to impart a deep transparent description to help you see what I see. Over the years, any accomplishments attributed to me truly belong to an unbelievably dedicated and talented team and I am referring not just to an incredible world-class finance organization, but to all of my 500,000 teammates with whom it has been an honor to serve. I am extremely optimistic about the future of FedEx. Over the years, we have invested in building unmatched physical and technological networks that are keeping the world’s supply chains moving with very high levels of reliability. Although our capital investments have sometimes…

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Thank you for your participation in FedEx Corporation’s first quarter earnings conference call. Please feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank you very much. Bye.

And again, that does conclude today’s conference. Thank you all for joining us.