Good day, everyone, and welcome to the FedEx Corporation Second Quarter Fiscal Year 2022 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx. Please go ahead.

Good afternoon, and welcome to FedEx Corporation's second quarter earnings conference call. The second quarter earnings release, Form 10-Q 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 Raj Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive VP, Chief Marketing and Communications Officer. And now, Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everyone. Let me begin by extending a heartfelt thank you to our more than 600,000 dedicated team members, especially those on the frontlines who are working relentlessly to successfully deliver another robust peak season for our customers. As expected, we are seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season. FedEx Ground had an outstanding Cyber Week, with 100 million packages picked up during the first official week of peak. Our ability to handle this influx of packages has been years in the making as we have taken deliberate steps to enhance our unparalleled network to support customers, large and small. This includes strategically adding more capacity across our network to support our growing customer base. For example, at FedEx Ground, this means adding 14.4 million square feet to our network, the equivalent of 300 football fields since June of this year. In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November just weeks before peak. While it was important that these facilities were up and running to add to a capacity in time for peak, experience tells us that they will operate with increasing efficiency in the weeks and months ahead. As we shared on the Q1 call, overcoming staffing and retention challenges due to the constrained labor market has been a key focus. We continued to take bold actions in Q2 to hire and invest in our frontline team members and thus increase network efficiency. These actions, including pay premiums, increased paid time off and tuition reimbursement. I am pleased to share that we have made considerable traction in recruiting frontline positions. Last week, we exceeded 111,000 applications, the highest level in FedEx history. To…

Thank you, Raj. Good afternoon, everyone. Q2 delivered our second consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result. Constrained capacity has continued to support a favorable pricing environment. We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements. We are working with large customers to identify opportunities, to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers. Small businesses relied our market leading transit times in our seven-day a week network to compete. They cannot afford to deploy inventory at the same scale as large retailers. Our domestic yield growth was 9.1% with fuel in Q2. Our general rate increase will take place in January, and we expect a strong capture rate. In January, the Ground Economy peak surcharge will be replaced by the new Ground Economy delivery surcharge at a $1, solidifying the price point for our Economy product. And as a reminder, FedEx Ground Economy was formerly FedEx SmartPost. The landscape across the industry remains robust and positions us well for continued profitable growth. We are forecasting that the U.S. domestic parcel market will reach 134 million pieces a day by calendar year 2026, a remarkable 70% growth from 2020. E-commerce is expected to drive 90% of the parcel market growth. We have developed a tremendous portfolio of e-commerce solutions, and we are very confident that our competitive value proposition will enable us to continue to take share smartly in the addressable e-commerce market. As you all know, we have a diversified customer base globally as well as here in the United States. And as such, we can confidently grow without the risk…

Thank you, Brie, and good afternoon, everyone. Given the historically challenging nature of peak season, along with the continued staffing challenges felt by numerous companies around the world, we are quite pleased with our second quarter consolidated financial results, with adjusted operating income up 11% year-over-year. While adjusted earnings per share was unchanged year-over-year, this year's effective tax rate was significantly higher as last year's earnings included a $0.71 per share discrete tax benefit from favorable guidance issued by the IRS. As we anticipated, most of the headwinds we experienced in the first quarter persisted through the second quarter, which dampened our Q2 profitability by an estimated $770 million. To further unpack our second quarter results, I will highlight several key drivers. The difficult labor market once again had the largest effect on our bottom line, representing an estimated $470 million in additional year-over-year costs. As I did last quarter, I'll separate the effect of the labor market into two components; higher rates and network inefficiencies resulting from labor shortages. Of the $470 million, we estimate $230 million was incurred in higher wage and purchase transportation rates. This included higher wage rates and paid premiums for team members and higher rates paid for third-party transportation services. We estimate network inefficiencies resulting from labor shortages, increased costs by approximately $240 million. These costs include additional line-haul, higher usage of third-party transportation, cost to reposition assets in the network over time and recruiting incentives all to address staffing shortages. Beyond the labor effects, our results for the second quarter also included the following headwinds; $90 million related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity; an estimated $75 million in incremental air network costs at Express due to the continued effect…

Thank you, Mike, and good afternoon to everyone on the call. As promised on the June Analyst Call, I am here to answer any questions specifically for me. Let me start by saying thank you to our hundreds of thousands of team members. This time of year is challenging, especially for those working tirelessly on our frontlines, but your hard work and dedication to keep our purple promise for our customers is evident by the Q2 results, Raj, Brie and Mike have covered well today. Let me also thank John Merino for his outstanding work for FedEx as our Corporate Vice President and Chief Accounting Officer over these last 23 years. I'm pleased to announce we will be hosting an Investor Meeting on Tuesday and Wednesday, 28, 29 June 2022 in Memphis. Mickey will share details after the New Year, and I'll now pass it back to him to begin the Q&A portion of the call. Mickey?

Now I'd like to open our question-and-answer session. And please remember, callers are limited to one question, so we can accommodate everyone.

[Operator Instructions] And we'll take our first question from Brandon Oglenski from Barclays. Your line is open.

Hey. Good evening, everyone, and thanks for taking my question. Fred, thanks for joining the call. I guess the supply chain constraints that we've seen in the past year have been pretty steep. Through your context of looking at this industry, how much of this rate increase and inflation that we see is going to really result in stickiness? Or is this really transitory as we get things moving again?

Well, this is Raj. Let me answer that question. The supply chain constraints we're seeing today are two-fold. One is because of the lack of supply of critical components like semiconductors and the second is because of the congestions we're seeing in the port. Now as you know, FedEx gets out traffic a few miles downstream from the port, and that supply chain is actually flowing pretty good through the United States. Of course, we are also flying over the top and delivering high-value goods from the global economy through the system. We expect the supply chain constraints to stay for some time. The air cargo capacity is going to be constrained for some more time, and we are very well positioned for success here. Let me also add this point that we have the network flexibility to scale up and down. The size and scale of our network is massive for us to be able to manage the cost accordingly as well. But for the foreseeable future, I think there is strong demand for our services internationally.

And next, we'll go to Ravi Shanker from Morgan Stanley. Your line is open.

Thanks very much. Fred, I would love your thoughts on the long-term competitive environment in the parcel phase. Amazon just told us that they believe that they are now the largest parcel carrier in the country, and you've seen the USPS kind of ramp up capacity meaningfully in the last decade as well. What does this industry look like 10 years from now kind of both competitively and kind of where, and just what do e-commerce supply chains look like? And what part of the business would you like to concentrate in?

Ravi, this is Raj. Let me just say that the e-commerce market is growing very strongly, as Brie pointed out the numbers in her remarks. We are in the center of that e-commerce growth ecosystem. When you talk about any retailers and their omnichannel story, what often gets missed is the FedEx story that's right behind it, underneath it. And as you can see from our growth in the last – these two fiscal years, we're going to grow more than $20 billion, and so we're not lacking for growth. When people talk about the last mile, sometimes and most times, they forget about the first few thousand miles. And again, some of the statistics that people see and talk about are so misleading that I don't even know what to say about that.

And next, we'll go to Ken Hoexter from Bank of America. Your line is open.

Great. Good afternoon. Raj, just as you think about the cost and you mentioned the decelerating labor impact that Mike talked about, with Ground hitting the lowest margin level in nearly two decades; Express, it's obvious you have the structure set up for sustained growth, particularly with Europe and TNT integration. Brie talked about that. But now looking at Ground, should we expect some of those costs to subside as the labor, you mentioned, gets easier. Maybe just walk us through your thoughts on how Ground shakes out with the growth of e-commerce and the impact on margin?

So Ken, this is Mike. Let me just highlight a couple aspects there as you think about the second half. So Ground had the most significant impact from the labor availability challenges. So that, again, has significantly impacted margin and profit this quarter. As we move through the rest of the fiscal year, we'll see further mitigation of that somewhat in Q3, particularly in Q4, if you recall, the labor market began to turn around that period of time. So we'll be lapping some of that plus, we will have fully address the network inefficiencies. That said, we're not projecting any change in the labor rates because that is a step change that we think will persist.

And Ken, let me add to that by saying this much. Firstly, the first and most important point is the demand for our services is very robust. The pricing environment is very robust. The labor headwinds start to recede in the second half. The investments that we have made get more efficient as we go into the second half and the technology investments that make us more efficient as well. So we expect in the second half, our profit and operating margins to improve year-over-year, and we get double-digit. So I guess that answers that question.

And next, we'll go to Tom Wadewitz from UBS. Your line is open.

Yes. Thank you. I wanted to get a little more color on the labor market. It does seem like it’s pretty tightly tied in Ground to your margin performance, whether you get traction on labor and kind of how rapidly that develops. So I guess is the assumption that you have that you convert a lot of the peak season labor to kind of ongoing? And then kind of how much visibility do you have to that? And I guess also, it seems like your point is stability in your cost per hour, let's say, for labor? Or are you assuming some further inflation in sequential increase in the cost per hour as you look out? Thank you.

Thank you, Tom. On the labor front, yes, we had obviously headwinds in the first two quarters and we actually landed pretty much where we thought it was going to be. Now, we are seeing, because of the actions we are taking considerable traction on the labor front, as I mentioned to you in my earlier remarks, just the last week, we had 111,000 applications for FedEx. That's the highest in our history. Again, to put that in context versus what we saw in May, that was 52,000. So you can see that we're making a lot of progress here. And so we are essentially staffed up for peak, and we think that we can hold on to the required labor to the second half. So that projections that we talk about now incorporate these assumptions. I don't know, Mike, if you want to add to that?

No, Tom, you're thinking about it in the right format there. Certainly, in December here, as the peak volume surge, we are continuing to navigate the network inefficiencies. But coming off a peak when the package handler count would otherwise perhaps go down further, we will stabilize that at a different level in order to optimize going forward. And just to reiterate, we're not assuming any reduction in the base pay rates as it were of labor from the market because I think that's well documented. That's here to stay, and we're managing to that going forward.

And next, we'll go to Chris Wetherbee from Citi. Your line is open.

Great. Thanks. Good afternoon. I want to talk about the guidance a little bit and sort of make sure that we understood the main drivers of the increase, particularly in the back half of the year. So we have some of the cost dynamics easing I think into the back half, obviously comps from year-over-year are more favorable, but if you were to look at the back half and think about Ground relative to maybe Express, if you could help us sort of parse out where you see the better opportunity and how that's reflected in the new guidance?

So Chris, let me go at it this way. So first the three key components for driving the second half of the year are the pricing initiatives, the labor aspects that we just covered, as well as the headwinds we had in second half of last year. So as Brie mentioned, we're being very thoughtful about the various pricing levers and initiatives. So recall that the GRI goes into effect in January and that the surcharges – certain surcharges that we announced back in September, first of those hit in November. So we only had one month in the second quarter, so that will hit the whole year, as well as the ongoing contract renewals. So those are three key things to keep front and center when you're thinking about drivers for the second half of the year. As far as the broader guidance overall, Q2 was above our expectations. As Raj mentioned, the labor impacts actually came in right in line with what we anticipated back in September, but we executed strongly on our revenue quality initiatives. We managed and deferred the various expenses, and we were able to accommodate incremental demand, particularly from Asia Pacific. So the combination of the second quarter, our outlook for the second half of the year and then, of course, the impact of the ASR on share count is the last component in terms of when you think about the pieces of the overall annual guidance change. So hopefully, that helps frame that.

And next, we'll go to Jack Atkins from Stephens. Your line is open.

Okay. Great. Thank you. I guess a question here for either Brie or Raj. But when you think about your opportunity set in Europe, particularly on the revenue side, can you maybe talk about the cadence of unlocking some of the revenue and market share capture opportunities in Europe once the integration of TNT is finally complete here in April, maybe help us think through what a fully integrated physical network with FedEx Europe and TNT will give you, and how will that help you with allowing for improved European profits overall?

Well, I think the short answer is we think post April that we have the best value proposition if you look at the combined bundle of intra-Europe Ground as well as intercontinental coming in and out of Europe. So we will have the very best coverage of overnight service across Western Europe from Europe into the U.S., and that combined with our leading Ground service. We think that that is just a great value proposition. As I mentioned, we're also making some pretty significant investments in our digital capabilities. So when we talked about the new FedEx Ship Manager online, we've already launched that in Europe and we've had great traction with it. So when we think about kind of post April, we've got a great portfolio for B2B and we are growing in e-commerce, which has been something that we haven't been able to do. As you look at the details that we released, you'll see that we're actually making room for growth for intra-Europe. So we're trading up from our international domestic portfolio in Europe. So we're making the right portfolio and customer mix decision to also really make sure we get the highest revenue quality out of our European business as well. We feel really good about the business right now.

And Jack, let me add one point to what Brie just mentioned. The ability for us to access low-cost intra-European networks for our international business in and out of Europe, that's the cost advantage as well in addition to all the portfolio and revenue opportunities that Brie just talked about.

And next, we'll go to Duane Pfennigwerth from Evercore ISI. Your line is open.

Hey. Thanks for the question. Just on the balance sheet, and maybe the answer is we got to wait until June, and look forward to seeing you in Memphis, but how do you think about the balance set longer term and the balance of share repurchase relative to balance sheet improvement from these levels?

Yes. Duane, this is Mike. I think, certainly, opportunity to explore that further in June, but I would just emphasize that the announcement of the authorization is just a logical evolution in where we have been in terms of capital allocation and strengthening the balance sheet. You recall, we repurchased – we paid down some debt in the fourth quarter of 2021. We increased the dividend 15% this past June. We continue to thoughtfully invest in the business for efficiency as well as growth. So this initiative is just as part of the overall capital allocation, and so that's just the next step along the way, and we can elaborate more and explore further in June.

And next, we'll go to Jordan Alliger from Goldman Sachs. Your line is open.

Yes. Hi. Just a question on the labor front, can you talk a little bit more about your progress on getting your core positions filled sort of the full-time folks versus just the seasonal hires that you needed? Just a point of clarification, I just want to make sure I heard right on the margin for Ground. Were you saying that the whole second half would average double- digit?

Yes. The answer to that question, Jordan, is that we are targeting second double-digit margins for the second half and improved year-over-year margins and improved year-over-year operating profit. So in terms of your other question, I'm sorry, say that again, I didn't quite understand it.

My question was in terms of the hiring that you've talked about, you've talked a lot about the applications that have gone up. I'm just wondering in terms of actually the hiring of the core positions, not the seasonal employees, but the folks that you need sort of year round, what progress have you made on that versus just sort of the 80,000 or 90,000 people you needed for peak?

So we hired at the rate of 10,000 to 12,000 per week since Q2. And again, our objective here is to make sure that these team members stay with us post peak and that we have the labor situations to make our networks more efficient. The whole problem was our networks were inefficient. And now even as we speak, we are reloading packages back to where it should be in the first place. And that's what's going to make the difference.

Hey, Jordan. This is Mike. Another aspect as we've aggressively addressed this situation is in terms of the flexibility, in terms of scheduling and engaging employees, such that it's not as binary as full-time, part-time there. And that there's the scheduling flexibility helps us well in terms of navigating labor availability when and where you need it.

And next, we'll go to Brian Ossenbeck from JPMorgan. Your line is open.

Hey. Good evening. Thanks for taking the question. Couple of follow-ups for you, Mike. You mentioned the vaccine mandate for federal contractors, obviously that was put on hold by a Court last week. So did that actually give you some cushion to work with? I guess, can you tell us if that was kind of a factor in terms of hiring people and if that was a headwind that you're now sort of relieved though? And then also, can you – you mentioned the ASR impact on EPS, I think it's 80% complete when it's once agreed upon. So imagine you can put a number around that for us. So please do that if you can? Thank you.

Yes, Brian, it obviously depends on the precise timing and market conditions, but it would be somewhat north of $0.20 per share for the balance of the – in terms of the overall annual EPS. As it relates to the hiring, as Raj said, we've set a record in terms of applications two weeks ago for hourly positions at vacant. So we expect to continue to see progress on that front, and we'll be very mindful of how that evolves.

And we'll take our next question from Scott Group with Wolfe Research. Your line is open.

Hey. Thanks for the question. So as we start to lap some of the tougher yield comps, how are you thinking about yield growth in the back half of the year? And then, Raj, I want to just ask you big picture or Fred, it does seem like there's a massive margin opportunity for the corporation relative to peers. You've maybe talked about some initiatives, but any way to quantify what you see in terms of the initiatives or the opportunity set?

This is Smith here. There is a massive margin improvement opportunity. Raj, you can talk about the rest of it.

The core business is very strong. We are in the middle of a very robust market and the pricing environment. As I've said before, on the e-commerce market growth, we are in the center of it. We are in the center of this ecosystem and this has got both volume and yield opportunities. Our core B2B business is very strong. In addition to that, we have three levers. One is the ability for us to optimize across our operating companies and to make sure the right package goes in the right network and be very smart about how we spread our assets and use our capacity. The second is the turnaround opportunity or the upside opportunity, I should say, in Europe as we finish up the physical integration and to the point that Brie talked about in detail earlier. And lastly, the ability for us to deliver value for all our stakeholders from our digital innovation. There's a lot of work going on in this regard. We are sitting on so much global insights about the – global supply chain every single day, and we're working with our customers to provide those insights, and there's value there as well. So there's significant opportunities to go beyond our base. Brie, do you want to add to that?

Yes, absolutely. I just want to kind of just double-click on the pricing environment in the back half. Yes, the comps are aggressive, but we still believe that there is upside from a revenue quality perspective. We're expecting a higher-than-normal capture of our general rate increase. We are making structural changes in all of our contracts as we move forward. We're just over 50% now of our customer base that we have renewed, so we still have some work to do there and some upside potential. We've also seen – small business was our fastest-growing segment again last quarter. So that, of course, is a great lift from a yield perspective. So yes, we're clear eyed that the comps are aggressive, but we still feel pretty confident in the pricing environment as we move forward, and we think we're doing a good job of managing kind of revenue quality as well as product and customer mix.

And our next question comes from Helane Becker with Cowen. Your line is open.

Thanks very much, operator. Hi, everybody. So two questions. The first is, Mike, would you still consider share purchase as aggressively as you are if Congress instituted a tax on them? And the second question is with regard to sustainability and how you're thinking about improving or reducing your carbon footprint either through use of SAF for the aircraft fleet or shifting to different electric vehicles and so on? And just kind of wondering how you're thinking about that maybe longer term over the next five or seven years?

Helane, this is Mike. I'll take the first part of that. Yes, we are aware of proposed legislation related to the repurchase, as you mentioned there. Our transaction will largely complete in December. So we'll just have to see how that would play out subsequent to that, but that's the accelerated share repurchase delivers much of it upfront.

And Helane, on the carbon-neutral goals, we have announced and we are very proud of it, the fact that we announced that we achieved carbon neutrality across our global operations by 2040, and we didn't do this casually. We thought about this a lot. And vehicle electrification is a key path to our success here. We are expanding the use of electric vehicles that will lead to significant reductions. We expect that 50% of FedEx Express global PUD vehicles will be electric by 2025, rising to 100% of purchases by 2030. So we're making good progress there. We have line of sight on the over-the-road vehicles. On the SAFs, yes, we will obviously look at that, but SAF represents a very small piece of the demand, and also the cost is not where it needs to be yet. So we know that there's some fundamental research needs to be done to really address this issue, and that's part of the reason why we're investing $100 million with the Yale to create the Yale Center for Natural Carbon Capture. And again, the initial work and focus on to offset the equivalent of carbon emissions from the aviation industry. So lots more to come here. But again, this is something we are very serious about and working with the best minds to get the answers.

[Operator Instructions] We'll take our next question from Jeff Kauffman from Vertical Research Partners. Your line is open. Please go ahead.

Thank you very much, and thank you for taking my question. Fred, while we have you on the phone, I was just curious, there's legislation moving through Congress to affect trade with China. I know there was news about a groundbreaking digital trade agreement between the U.K. and Singapore. I know this has always been a popular topic with you. What is your view on the status of trade policy out there? And can you talk a little bit about any catalysts that might occur that might be beneficial with the company coming up?

Well, we have expressed to both Republican and Democratic administrations that we feel that it was a major mistake for the United States to walk away from the Trans-Pacific Partnership. What that agreement did was to allow us to deepen our trade ties with our other trading partners. And of course, given the leadership of Japan, the other participants did go forward with it. So the best way to normalize the relationships with China is to sign TPP and get a more normalized trading relationship, which China would like to then join. And on the broader issue, obviously, we feel very strongly. As our great Secretary of State, Cordell Hull, said decades ago, he and Roosevelt were really the architects of United States promoting open trade. It's when goods cross borders, armies rarely do. So the best way to keep a harmonious relationship with China is not to disconnect, to trade where we can. And that's what we support. And I'm hopeful that at the end of the day that cooler heads will prevail, and we'll join the TPP and we will try to have that constructive relationship with China. The reality is people forget about this, and all of the populous politics. The trade that the United States promoted in the last 30 years gave each household in the United States an increase in disposable income of about $10,000 or $11,000. I mean it was a huge benefit, an enormous tax decrease. So we are strong free traders, and we think we should stay engaged in China, and we hope the administration does that. And I quite frankly, am optimistic because I think at the end of the day, that view will eventually prevail. Particularly in a period of labor shortage, it's impossible for the United States to manufacture all the goods that consumers in the United States want. So I hope that was helpful.

And next, we'll go back to Bascome Majors from Susquehanna. Your line is open.

Yes. Thanks for taking my question. You own the largest less in truckload business in North America. It could do potentially close to $2 billion in EBITDA this year. How do you get investors to focus more and give you more credit for having that valuable asset?

Bascome, we appreciate the question. We are very proud of the results of FedEx Freight and we see great opportunity going forward. That's a key part of the overall enterprise strategy. Raj highlighted some of the collaboration initiatives. It will have a key role as well as it grows the very successful FedEx Freight Direct product that's being well received. And so I think it will be just continuing to focus on the success as the largest LTL carrier in terms of the revenue quality and sustainability of the performance of the Freight business as a stand-alone as well as the synergies that will accrue to the overall enterprise as we increase collaboration beyond what Raj highlighted earlier.

And let me just reiterate that FedEx Freight is an important part of our overall enterprise strategy, and our results at FedEx Freight, our outstanding margins illustrate that our strategy is working.

And next, we'll go to David Vernon from Bernstein. Your line is open.

Hey. Good afternoon, everyone. Thanks for taking the question. Raj, I'd love if you could help us really understand kind of what that opportunity is inside of Europe. I remember when you guys first announced the acquisition of TNT, you're sharing some information around the profitability of the Domestic segment versus Europe. Can you give us a sense for whether you're making money in Europe today and what the margin level is and where it can go through?

We're not going to break out the numbers for you that you asked for, but let me just address it qualitatively. The rationale for the integration remains as sound as it was when we made the acquisition. The portfolio in Europe, we're talking about international. In and out of Europe, in the continental, we are very strong there. Intra-European Express, we are doing pretty good. It's the intra-European Ground business that we didn't have very minimal share. Well, with TNT, we have the best player in that business. Now that being part of this portfolio and we will stay very disciplined on the international domestic business, we now have the portfolio to make it successful and piece it all together not only from a customer value proposition perspective, but also from a cost of moving international, especially economy goods on the road. So I hope that answered the question, but we feel that – and also, the restructuring program that we announced earlier this calendar year is on track to make sure that we are as efficient as possible in Europe. So a lot of things going on. Very excited about what April 2022 brings.

Yes. David, it's Mike. It's just important to reiterate that completing the physical integration here at the end of this fiscal year really sets the foundation to enable this opportunity going forward, and we can certainly expand upon that in further detail when you all come visit us in June.

And next, we'll go to Bruce Chan from Stifel. Your line is open.

Hey. Thanks, operator, and good evening, everyone. Maybe just another one on the LTL side because we've spoken a bit about the ground network expansion here, but for LTL, you've got several peers that are adding some meaningful terminal capacity. Maybe you could just give us a sense of where you are right now in terms of freight facility utilization and then whether you plan to grow the network there as well? Thank you.

The LTL side, our utilization is strong, but we are very disciplined in how we manage that business. The revenue quality and efficiency are watchwords as we – we are the number one revenue share in this segment, and so all I would say there is that the demand for our business continues strong. Our revenue quality remains strong, and we will be very judicious in how we add capacity.

Yes. Bruce, this is Mike. ADS grew 3% in the quarter. The revenue quality focus came through in the bottom line, and we continue with our initiatives to incorporate technology into the LTL business to do exactly what you ask about there and enhance the efficiency and utilization of our assets.

And our last question comes from Todd Fowler with KeyBanc Capital Markets. Your line is open.

Great. Thanks and good evening, everyone. Just to close out on Ground margins. It sounds like that you've got some stabilization now as we move into the back half of the year, but how do we think about the longer-term path to moving beyond kind of the high-single to low double-digit margin range you've been in? Obviously, there's been a lot of revenue growth in the segment, but how do we move kind of beyond the margin range of the past couple of years? Is that something that you need to price to get the margin level up? Is it getting some of the efficiencies? And how do you think about normalized incremental margins there? Thanks.

So Todd, this is Mike. I know we threw a lot at you as it relates to the initiatives there, but they will continue to build in terms of – labor is one piece. We talked about the new facilities we opened. Those facilities aren't as efficient at the outset. We are making – we are seeing that from those that we opened last year. We're also exploring different ways to even fully utilize those assets, the technology elements that Raj highlighted. So there's a number of components there that come together and will be integral to driving Ground profitability and margins higher, and so we're very optimistic about the trajectory there, and getting past this headwind of the labor right now really will be a good launching point for these other aspects to gain even more traction.

And we have no further questions in the queue. I'll turn it back over to management for closing remarks.

Thank you for your participation in the FedEx Corporation's Second Quarter Earnings Conference Call. Feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank you very much.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.